Chapter 12 - Chapter 12: Differential Analysis and Product...

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Chapter 12: Differential Analysis and Product Pricing
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Differential Analysis Differential Revenue – the amount of increase/decrease in revenue expected from a course of action as compared with an alternative. Differential Cost – the amount of increase/decrease in cost expected from a course of action as compared with an alternative. Differential Revenue – Differential Cost = Differential Income
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Differential Analysis Differential analysis looks at the effects of different courses of action. Focuses on relevant revenues and costs . Ignores sunk costs – those costs that have occurred in the past and are irrelevant for future decision making.
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Differential Analysis in Six Situations 1. Leasing or selling equipment. 2. Discontinuing an unprofitable segment. 3. Manufacturing or purchasing a needed part. 4. Replacing usable fixed assets. 5. Processing further or selling an intermediate product. 6. Accepting additional business at a special price. 7. Choosing the best product under production bottleneck.
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Lease or Sell: Problem Statement Marcus Company has equipment to dispose. The equipment originally cost $200,000, and accumulated depreciation is $120,000. Two alternatives: Lease the equipment for $160,000 less $35,000 in repairs, taxes, etc. Sell the equipment for $100,000 less 6% commission.
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NOTE: The $80,000 book value is a sunk cost and is ignored.
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Problem Statement Battle Creek Cereal Co. produces and sells three kinds of cereal. Because Bran Flakes exhibits an operating loss, the company is considering discontinuing production and sale of the product. If fixed costs remain the same, is this the
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This note was uploaded on 02/24/2011 for the course ACCT 7080 taught by Professor Housain during the Spring '11 term at U. Memphis.

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Chapter 12 - Chapter 12: Differential Analysis and Product...

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