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AFM102February282011

AFM102February282011 - Introduction to Management...

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Click to edit Master subtitle style 5/11/11 © Anthony Atkinson and Patrick Connolly Introduction to Management Accounting AFM 102 February 28, 2011 Relevant Cost Analysis 11
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5/11/11 © Anthony Atkinson and Patrick Connolly Key Concepts in Today’s Class Relevant cost analysis The replacement decision 22
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5/11/11 © Anthony Atkinson and Patrick Connolly The Replacement Decision Relevant costs involved in the replacement decision The net capital cost incurred The operating cost savings 33
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5/11/11 © Anthony Atkinson and Patrick Connolly 44
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5/11/11 © Anthony Atkinson and Patrick Connolly 55 5-46 (a) Net cost saving over 4 years with new machine Cash inflow: Salvage value difference $ 2,000 Decrease in annual operating costs (4 years × $60,000) 240,000 Reduction in rework cost 10,000 a Cash outflow : Acquisition of new machine ($360,000 – $100,000) (260,000) Net cash inflow (outflow): ($ 8,000) a 0.05 (100,000 × 4) × $1 = $20,000 – 0.025 (100,000 × 4) × $1 = –$10,000 Reduction in rework $10,000 Syd Young should not replace the old machine due to net cash outflow of ($8,000).
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