Review Notes Ch 23 - BLOOMS TAXONOMY TABLE CHAPTER 23...

CHAPTER 23
Incremental Analysis and Capital Budgeting
STUDY OBJECTIVES
1. IDENTIFY THE STEPS IN MANAGEMENT’S DECISION-
MAKING PROCESS.
2. DESCRIBE THE CONCEPT OF INCREMENTAL ANALYSIS.
3. IDENTIFY THE RELEVANT COSTS IN ACCEPTING AN
ORDER AT A SPECIAL PRICE.
4. IDENTIFY THE RELEVANT COSTS IN A MAKE-OR-BUY
DECISION.
5. GIVE THE DECISION RULE FOR WHETHER TO SELL
OR PROCESS MATERIALS FURTHER.
6. IDENTIFY THE FACTORS TO CONSIDER IN RETAINING
OR REPLACING EQUIPMENT.
7. EXPLAIN THE RELEVANT FACTORS IN WHETHER TO
ELIMINATE AN UNPROFITABLE SEGMENT.
8. DETERMINE WHICH PRODUCTS TO MAKE AND SELL
WHEN RESOURCES ARE LIMITED.
BLOOM’S TAXONOMY TABLE

CHAPTER REVIEW
Incremental Analysis
1. (S.O. 1) 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 results of decision.
2. (S.O. 2) Business decisions involve a choice among alternative courses of action. In making such
decisions, management ordinarily considers both financial and nonfinancial information. The process
used to identify the financial data that change under alternative courses of action is called incremental
analysis.
a. Incremental analysis includes 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.
3. 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.
Accept an Order at a Special Price
4. (S.O. 3) 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, generally only variable costs will be
affected.
Make or Buy
5. (S.O. 4) In a make or buy decision, management must determine the costs which are different
under the two alternatives. If there is an opportunity to use the productive capacity for another
purpose, opportunity cost should be considered. Opportunity cost is the potential benefit that may be
obtained by following an alternative course of action. This cost is an additional cost of making the