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Chapter 23 - Managerial Accounting ANALYSIS FOR DECISION...

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Chapter 23 Author: Anna Rovira Beavers Needles 2008 8/18/08 1 Managerial Accounting A NALYSIS FOR DECISION MAKING Chapter 23 W HAT ARE SHORT DECSION ANALYSIS ? Decisions that managers encounter during the course of the year that can affect the activities of the organizations Some of these activities can be revenue-generating opportunities, such adding a new product line or review or update revenue generating processes making processes. Other short-term decision analysis may include cost cutting measures, such as deleting product line, outsourcing work that is typically process by the organization, etc. In this chapter we are going to define several examples of short run decisions, such as: a. Incremental Analysis b. Outsourcing decisions c. Segment profitability decisions d. Product mix decisions involving constrains resources e. Decisions in services organizations I. I NCREMENTAL A NALYSIS : A method of comparing alternatives by focusing on the differences in their projected revenues and costs. For example JYZ Inc, a cloth toy manufacturing company, is thinking of relocating from San Francisco to the Sacramento area. Some of the advantages to relocating in that area are: inexpensive real estate, less costly labor, less costly taxes, etc. Let say that in San Francisco JYZ Inc. pays $150,000 for monthly lease, it has 200 employees whose average salary is $25 an hour, including benefits, and they work 256 days a year. In Sacramento the rent for the same size location would cost $50,000, and the average employee salary is around $18 an hour. It is expected that revenue may increase 10% per year due to increase location capacity. This growth will begin in the first year. Their annual revenue is around $500,000 and it is expected to grow at a rate of 3% annually. How can we find the benefits of relocation for JYZ? 1. Find a number of years we want to do the analysis for, let say 5 years. 2. Let’s make a list of the information that will be needed to do the analysis.
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Chapter 23 Author: Anna Rovira Beavers Needles 2008 8/18/08 2 Year One Actual Project Differential Revenue: 500,000 550,000 0 Expenses: Lease expense 150,000 50,000 100,000 Labor Expense 1,280,000 921,600 358,400 Number of employees Relocation expense ($1,000 per employee) I is expected that only 2%% will relocate Hiring Expenses per employee $250 Training Expenses per employee. Consist $300 Cost of keeping non-relocating until new hires are completely trained. First month 90%, Second month 80% Third Month 70% Operations completely transfer to new locations at the end of the third month. Group work Special Considerations: 1. Remember the decision to move will be based on the differential cost since actual cost are considered sunk cost. (Sunk cost is a cost that was incurred because of a previous decision and that cannot be recovered though the current decision) 2. Another factor that needs to be considered is opportunity cost , that is the benefits, either from revenue or cost savings, that will be forfeited or lost when one alternative is chosen over the other.
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