wk9_ch11n - Ch 11: Decision-Making and Relevant Information

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Ch 11: Decision-Making and Relevant Information
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Decision-making: a very basic  framework choice among several alternatives choose the alternative that yields highest profit profit = revenues - costs
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Relevance Key shortcut in making decisions: FOCUS ON RELEVANT COSTS/REVENUES Relevant Costs/Revenues: differ across decision alternatives What don’t we care about? (i.e., irrelevant): sunk costs (costs already incurred in the past) future costs that do not differ across decision alternatives
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Relevance: Why so important? In general: allows us to identify what to focus on in a “sea” of information In our context: what product costs to focus on in the current decision DIFFERENT COSTS FOR DIFFERENT DECISIONS
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Types of decisions we’ll look at  next One-Time-Only Special Orders Make or Buy Equipment Replacement Inventory decisions (carrying cost) Branch / Segment: Adding or Discontinuing Product Mix under (binding) Capacity Constraints
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Example: One-time special order Alpha Company makes baseball bats that it sells for $32 each. At full capacity, the company can produce 60,000 bats a year. At current production and sales volume of 50,000 bats, its costs are as follows: Beta Company wants to place a special order for 10,000 bats at $25 each. Alpha will incur no variable selling costs for this special order. Also, it does not anticipate any alternative use for its unused capacity. Question: Should Alpha accept this special order? cost per bat total costs direct materials $12 $600,000 direct labor 3 150,000 variable overhead 1 50,000 fixed overhead 5 250,000 variable selling expenses 2 100,000 fixed selling expenses 4 200,000 total costs $27 $1,350,000
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Make vs Buy decision produce components in-house vs buy them from outside suppliers same revenue in both cases => revenue is irrelevant => only focus on (relevant) costs
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This note was uploaded on 04/28/2011 for the course ACCOUNTING 2521 taught by Professor Byzalov during the Spring '11 term at Temple.

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wk9_ch11n - Ch 11: Decision-Making and Relevant Information

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