Notes Ch 7

Notes Ch 7 - iii. Sell product s or process them further....

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Busi 101 Notes Ch. 7 Incrementral Analysis I. Management’s Decision-Making Process a. Incremental Analysis Approach i. Definition: The process used to identify the financial data that change under alternative courses of action. ii. In some cases, costs and revenues vary; in others, only costs or revenues will vary. b. How Incremental Analysis Works i. Compares alternative courses of action in terms of revenues, costs, and net income. ii. Three Cost Concepts to be analyzed: 1. Relevant Cost: Costs and revenues that differ across alternatives. 2. Opportunity Cost: A benefit of another course of action that is lost when a company chooses another course of actions. 3. Sunk Cost: Costs that have already been incurred and will not be changed or avoided by any present or future decision. II. Types of Incremental Analysis a. Most common types of decisions that involve incremental analysis are whether to: i. Accept an order at a special price. ii. Make or buy component parts or finished products.
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Unformatted text preview: iii. Sell product s or process them further. iv. Retain or replace equipment v. Eliminate an unprofitable business segment. b. Accept an order at a special price i. If additional units can be produced within existing plant capacity, then the special order will not increase fixed costs. ii. We assume that the sales of the product(s) in other markets would not be affected by this special order. iii. If a company is operating at full capacity , a special order would most likely be rejected. c. Make or Buy Component Parts i. Remember that all fixed costs may not be avoided when outsourcing. ii. Opportunity Cost : must be considered if the productive capacity to make a component that will be bought can be used in some other manner. This cost is added to the costs associated with deciding to make the component as opposed to buying it. d. Sell or Process Further (sell unfinished/ i....
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Notes Ch 7 - iii. Sell product s or process them further....

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