Chapter 7 Notes

Chapter 7 Notes - Chapter 7 Notes 7.1 Incremental Analysis...

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Chapter 7 Notes 7.1 Incremental Analysis Incremental Analysis : the analysis of the incremental revenue and the incremental costs incurred when one decision alternative is chosen over another. Incremental revenue : the additional revenue received as a result of selecting one decision alternative over another. Incremental cost (relevant costs, differential costs): the additional cost incurred as a result of selecting one decision alternative over another. If an alternative yields an incremental profit (the difference between incremental revenue and incremental cost), then it should be selected. Note that depreciation, rent, and other fixed costs are not incremental in this decision, since none of these costs changed. Thus, they are not relevant to the decision at hand. This is not to say that a fixed cost is never incremental . Sometimes decisions have a major impact on operations and cause costs that are normally considered to be fixed to change. (rent which is normally fixed would change, becoming incremental) 7.2 Analysis of Decisions Faced by Managers Decisions managers frequently face: 1. The decision to engage in additional processing of a product 2. The decision to make or buy a product 3. The decision to drop a product line Additional Processing Decision Sell computers in uncompleted form for $500 each, or incur costs to complete the computers and then sell for $1,000? Bridge Computer Costs of Model 250 Computer Costs per Unit Incurred to Date Costs per Unit to Complete Material $300 $200 Labor 200 100 Variable overhead 100 100 Fixed overhead 200
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Bridge Computer Costs of Model 250 Computer Costs per Unit Incurred to Date Costs per Unit to Complete $800 $400 Make or Buy Decisions No incremental revenues are involved. Therefore, the analysis of this decision concentrates solely on incremental costs. Wendy received an offer from Dillard Compressor Corporation to supply 50,000 compressors at $310
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This note was uploaded on 02/04/2011 for the course ACG 2071 taught by Professor Lopez during the Summer '08 term at Valencia.

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Chapter 7 Notes - Chapter 7 Notes 7.1 Incremental Analysis...

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