10014_050710_18 - amount SM = 100,000 Make Buy 19.50 22.50...

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Chapter 13 – Differential Analysis What costs do we consider when making a decision? How do we compare costs between alternatives? In analysis, never include: o Sunk costs: already incurred & cannot be avoided no matter what alternative we choose (ie. Depreciation) o Base your decision on the remaining costs and benefits EXCEPT future costs that are the same no matter what alternative is chosen 1. Make or Buy Decision Example: Handout Make Buy DM 8 DL 6 VOH 4 FOH Dep. No (Sunk) Superv. 1.50 Comm FC No (Future)_______ 19.50 22.50 = Continue to make (Save $3) a. Segment margin is the opportunity cost of continuing to make the part (benefit foregone). Therefore, more willing to pay outside supplier for part x a higher
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Unformatted text preview: amount SM = 100,000 Make Buy 19.50 22.50 x 20,000 units x 20,000 units 390,000 450,000 + 100,000 (SM) 490,000 2. Sell or Process Further Joint cost $100,000 A B 10,000 gallons SP=9 5,000 gallons Process $50,000 But SP = 15 ** Joint costs are never included in your analysis. They are not relevant Final SP 15 Int. SP 9 ^ in SP 6 X 10,000 gallons ^ in rev. 60,000 ^ in process 50,000 ^ in NOI 10,000 = Yes, process further 3. Open or Close Open Close 4000 x 20 80,000 4000 x 11 44,000 0____ CM 36,000 FOH 60,000 35,000 Net loss <24,000> <35,000> Decision = stay open. If we close, we’ll lose $11,000 more (35,000-24,000)...
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