WRD_ch25

Accounting

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1 Introduction to Accounting and Business 25 Differential Analysis and Product Pricing
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2 1-2 25-2 1-2 After studying this chapter, you should be able to: Differential Analysis and Product Pricing 3 Compute the relative profitability of products in bottleneck production processes. 2 Determine the selling price of a product using the total cost, product cost, and variable cost concepts. 1 Prepare differential analysis reports for a variety of managerial decisions.
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3 1-3 25-3 1 1 Prepare differential analysis reports for a variety of managerial decisions.
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4 1-4 25-4 Managerial Decision Making Step 1: Identify the objective of the decision Step 2: Identify the alternative courses of action Step 3: Gather relevant information Step 4: Make a decision Step 5: Review, analyze, and assess the results of the decision 1
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5 1-5 25-5 Sunk Costs Costs that have been incurred in the past are not relevant to the decision. These costs are called sunk costs . 1
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6 1-6 25-6 Differential revenue is the amount of increase or decrease in revenue that is expected from a course of action as compared with an alternative action. Differential Revenue 1
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7 1-7 25-7 Differential cost is the amount of increase or decrease in cost that is expected from a course of action as compared with an alternative action. Differential Cost 1
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8 1-8 25-8 Differential income (or loss) is the difference between the differential revenue and the differential costs. Differential income indicates that a particular decision is expected to be profitable, while a differential loss indicates the opposite. Differential Income or Loss 1
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9 1-9 25-9 Differential analysis focuses on the effect of alternative courses of action on the relevant revenues and costs. Differential Analysis 1
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10 1-10 25-10 Differential Analysis Exhibit 1 1
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11 1-11 25-11 1. Leasing or selling equipment 2. Discontinuing an unprofitable segment 3. Manufacturing or purchasing a needed part 4. Replacing fixed assets 5. Processing further or selling a product 6. Accepting additional business at a special price Differential analysis is used to analyze the following alternatives: 1
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12 1-12 25-12 Marcus Company is considering leasing or disposing of the following equipment: Lease or Sell Cost of equipment $200,000 Less accumulated depreciation 120,000 Book value $ 80,000 Lease Option: Total revenue for five-year lease 160,000 Total estimated repair, insurance, and property tax expenses during life of lease 35,000 Sell Option: Sales price $100,000 Commission on sale 6% 1
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13 1-13 25-13 Differential Analysis Report—Lease or Sell Exhibit 2 1
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14 1-14 25-14 Traditional Analysis Exhibit 3 1
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15 1-15 25-15 Example Exercise 25-1 Lease or Sell 1 25-15 Casper Company owns office space with a cost of $100,000 and accumulated depreciation of $30,000 that can be sold for $150,000, less a 6% broker commission. Alternatively, the office space can be leased by Casper Company for ten years for a total of $170,000 at the end of which there is no salvage value. In addition, repair, insurance, and property tax that would be incurred by Casper Company on the rented office space would total $24,000 over the ten years. Determine the differential income or loss from the lease alternative for Casper Company.
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This document was uploaded on 06/02/2011.

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WRD_ch25 - 25 Differential Analysis and Introduction to...

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