cornerstones chp 11

cornerstones chp 11 - Chapter 11 Short-Run Decision Making...

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May 26, 2011 Accounting 2102 1 Chapter 11 Short-Run Decision Making: Relevant Costing and Inventory Management
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“. . . short-run decisions are often small-scale actions that serve a larger purpose .” decision making model 1. identify the decision to be made 2. identify the alternatives and their costs and benefits calculate the differential cost (relevant vs irrelevant) consider opportunity costs ignore sunk costs identify qualitative factors 3. make the decision May 26, 2011 Accounting 2102 2
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Common Relevant Cost Applications Make-or-Buy . . .  Four Wheel Deal, LLC Special Orders . . . Who Needs Jelly? Company Keep or Drop . . . Stock Your Pantry, Inc. Process Further or Sell . . . Loco for Cocoa, Inc. Product Mix Decisions . . . Don’t Cry Over Spilled Milk, LLC May 26, 2011 3 Accounting 2102
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Make-or-Buy . . . Outsourcing Four Wheel Deal, LLC Variable Costs of producing in house versus outsourcing price Fixed Costs are any eliminated or avoided? Capacity what will be done with freed up capacity? May 26, 2011 4 Accounting 2102
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Make-or-Buy . . . Outsourcing Four Wheel Deal, LLC Four Wheel Deal, LLC is a manufacturer of four wheel drive vehicles and has a monthly production capacity of 5,000 vehicles. The company currently manufactures all of its transmissions. Related manufacturing costs are as follows: An outsourcing company has been identified and is willing to provide transmissions of equal quality at a cost of $400 each. If outsourced, fixed overhead will decrease by $300,000.
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