chapter%207%20-%20ACCT%202332%20-%20spring%202010

chapter%207%20-%20ACCT%202332%20-%20spring%202010 - Chapter...

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Chapter Chapter 7: Using cost information in 7: Using cost information in decisions decisions
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Chapter Chapter 7: Using cost information in 7: Using cost information in decisions decisions Incremental analysis Sell or process further Make or buy decisions Dropping or keeping a product line Analysis of situations involving joint costs
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Incremental Analysis Incremental Analysis Incremental Revenue Additional revenue received by selecting one alternative over another Incremental Cost Additional cost incurred by selecting one alternative over another Incremental Profit Difference between incremental revenue and incremental cost
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Incremental Analysis Example Incremental Analysis Example Jensen Rapid Copy Center operates between the hours 6AM to 8PM. They are trying to decide whether or not to expand their hours. Alternatives: 1. Keep the current hours 2. Stay open until midnight 3. Stay open 24 hours How should we organize cost and revenue information to make this decision?
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Incremental Analysis Example Incremental Analysis Example
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Incremental Analysis Example Incremental Analysis Example Expanded Expanded
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A decision regarding hours of operation A decision regarding hours of operation The analysis shows that based on the numbers the best decision is to extend the hours until midnight but not to 24 hours. Notice that depreciation, rent and other fixed costs could have been left out of the analysis because they do not change, so we say that they are irrelevant to this decision. The relevant costs are the ones that change between alternatives.
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Incremental Analysis: Incremental Analysis: Opportunity Costs Opportunity Costs Opportunity Costs: Value of benefits foregone by selecting one decisions alternative over another Usually we use this term when we talk about two alternatives that “cancel” each other: Get a degree or stay working Work on one project or the other Choose to produce a certain product or the other Etc.
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Opportunity Cost: Example Opportunity Cost: Example Finn’s Seafood Restaurant has been approached by New England Investments, which wants to hold an employee recognition dinner next month. Lillian summer, a manager of the restaurant, agreed to a charge of $65 per person for food, wine, and dessert, for 150 people. She estimates that the cost of unprepared food will be $30 per person and beverages will be $12 per person. In order to accommodate the group, Lillian will have to close the restaurant for dinner that night. Typically, she would have served 160 people with an average bill of $50 per person. On a typical night, the cost of unprepared food is $18 per person and beverages are $13 per person. No additional staff will need to be hired to accommodate the group from New England
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chapter%207%20-%20ACCT%202332%20-%20spring%202010 - Chapter...

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