Chapter 24 - 24 Differential Analysis and Product Pricing...

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1 24 Differential Analysis and Product Pricing Student Version
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1-2 24-2 2 1 1 Prepare differential analysis reports for a variety of managerial decisions.
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1-3 24-3 3 Sunk Costs Costs that have been incurred in the past are not relevant to the decision. These costs are called sunk costs . 1
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1-4 24-4 4 Differential revenue is the amount of increase or decrease in revenue that is expected from a course of action as compared with an alternative action. Differential Revenue 1
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1-5 24-5 5 Differential cost is the amount of increase or decrease in cost that is expected from a course of action as compared with an alternative action. Differential Cost 1
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1-6 24-6 6 Differential income (or loss) is the difference between the differential revenue and the differential costs. Differential income indicates that a particular decision is expected to be profitable, while a differential loss indicates the opposite. Differential Income or Loss 1
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1-7 24-7 7 Marcus Company is considering leasing or disposing of the following equipment: Lease or Sell Cost of equipment $200,000 Less accumulated depreciation 120,000 Book value $ 80,000 Lease Option: Total revenue for five-year lease 160,000 Total estimated repair, insurance, and property tax expenses during life of lease 35,000 Sell Option: Sales price $100,000 Commission on sale 6% 1
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1-8 24-8 8 Differential Analysis Report—Lease or Sell Exhibit 2 1
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1-9 24-9 9 Management may consider discontinuing the product or segment of a business that is generating losses. Based on the information contained in the condensed income statement ( Slide 10 ), management of Battle Creek Cereal Co. is considering discontinuing Bran Flakes. Discontinue a Segment or Product 1
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1-10 24-10 10 Income (Loss) by Product Exhibit 4 1
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1-11 24-11 11 Differential Analysis Report—Discontinue an Unprofitable Segment Don’t discontinue Bran Flakes! Exhibit 5 1
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1-12 24-12 12 Make or Buy An automobile manufacturer has been purchasing instrument panels for $240 a unit. The factory currently operates at 80% of capacity. The cost per Direct materials $ 80 Direct labor 80 52 Fixed factory overhead 68 Total estimated cost per unit $280 1
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1-13 24-13 13 Differential Analysis Report—Make or Buy Exhibit 7 1
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Chapter 24 - 24 Differential Analysis and Product Pricing...

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