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Chapter 7 - mental Analysis Accept an order at a special...

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Accept an order at a special price. Make or buy. Sell or process further. Keep or replace equipment. Eliminate an unprofitable segment. Incre mental Analysis Management's decision-making process frequently involves the following steps: a. Identify the problem and assign responsibility. b. Determine and evaluate possible courses of action. c. Make a decision. d. Review the results of the decision. Accounting's contribution to the decision-making process occurs primarily in steps (b) and (d). Business decisions involve a choice among alternative courses of action. In making such decisions, management ordinarily considers both financial and non- financial information. The process used to identify the financial data that change under alternative courses of action is called incremental analysis : a.Incremental analysis involves not only identifying relevant revenues and costs, but also determining the probable effects of the decision on future earnings. b. Data for incremental analysis involves estimates and uncertainty. c.Gathering data may involve market analysts, engineers, and accountants. In incremental analysis, both costs and revenues may change. However, in some cases: (1) variable costs may not change under the alternative courses of action; and (2) fixed costs may change. Alternative A Alternative B Net Income Increase (Decrease) Revenues $125,000 $110,000 $(15,000) Costs 100,000 80,000 20,000 Net income $ 25,000 $ 30,000 $ 5,000 TYPES OF INCREMENTAL ANALYSIS 1. Accept an Order at a Special Price f206e34d1704b7fdea7318242c60f36707634b91 1
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An order at a special price should be accepted when the incremental revenue from the order exceeds the incremental costs: a.It is assumed that sales in other markets will not be affected by the special order. b. If the units can be produced within existing plant capacity, then generally only variable costs will be affected. EXAMPLE Your company produces 10,000 units which is 80% of capacity and its normal selling price is $25/unit. THE FOLLOWING COST DATA ARE PROVIDED AT 10,000 UNITS: Variable cost per unit………………………………………………..$16 Required: 1. Will you accept a special order from a foreign company for an additional 2,000 units at a price of $22/unit? 2. Will you accept a special order from a foreign company for an additional 2,000 units at a price of $19/unit?
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