Chapter%206 - firm; UNIVERSITY or TEXAS AT AUSTEN MCCOMBS...

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Unformatted text preview: firm; UNIVERSITY or TEXAS AT AUSTEN MCCOMBS SCHOOL OF BUSINESS ACC 312 — Spring 2011 Fundamentals of Managerial Accounting Instructor — Brian Lendecky, MPA, CPA (copyright © 2011 Brian Lendecky) Tuesday and Thursday, February 15 & 17, 2011 Chapter 6 — Decision Making in the Short Term Characteristics of Short-Term Decisions Let’s look at Exhibit 6.1 on the next page. A company’s capacity is fixed in the short-run, yet most companies’ actual demand tends to fluctuate. Short-term decisions can be classified into two broad categories: 1. Decisions that deal with excess supply 2. Decisions that deal with excess demand Qualitative and Quantitative Information As you know, non-financial aspects of a decision can have HUGE negative financial impact (ex. employee morale, bad publicity). Making business decisions is not as easy as just comparing calculations. Your job as the accountant is to present the quantitative information. Examples — Outsourcing Part A saves us x amount of dollars or shutting down the Cleveland plant saves us x amount of dollars. But, that’s only half the battle. Qualitative forces can’t be “plugged” into calculations. They are up to everyone’s opinions. Let’s say an accountant calculates shutting down the Cleveland plant saves the company $1,000,000 a year. I might say that’s not worth the bad employee morale and bad press. Somebody else might say it is. The quantitative data and information of decisions is the relatively easy part. The qualitative aspects of the decision are what make a meeting last 8 hours. mtofitmb 2:8 tocm Smut... $5 $83: 05 hcmfigobtb €04 baasw wwmoxm £3; mnomaa s ncmEma mmmexm 5:5 wnomaa 3633 3:535 mfiwssgfiw figgmfim S Exfi fififigfi .mzmwxafifiw ME: @fiafimw Ear «r :m—mn U :men— Common Business Decisions The six common business decisions discussed in this chapter are: 1. Accept or reject a special or one-time-only order Short-term promotion decisions Outsource a product or service (aka make-or—buy decision) Add or drop a service, customer, product, department, location, etc. Joint products — sell or process further . Decisions involving limited resources (aka product mix under capacity constraints) mweww Again, the author’s of this book explain several different ways to calculate these problems (the relevant cost analysis approach, the totals or gross approach, decisions with a status quo, without a status quo, etc.). I think the book makes this topic read more difficult than it really is. There is one simple way to calculate the answer to all these problems. . ..decipher what information is relevant and what isn’t and then compare the relevant information! Remember from Chapter 2: In order for costs and benefits to be relevant it must meet two criteria: 1. Bearing on the Future Sunk Costs — past costs that have already been incurred. They are irrelevant in decision making because the amounts cannot be changed by any of the alternatives. Key note... Relevant information must involve costs and benefits to be realized in the future. Therefore past/historical/sunk costs may be helpful as a basis for making predictions, however past costs themselves are always irrelevant when making decisions. 2. Differs among the alternatives Opportunity Costs — cost or benefit of a forgone alternative. Veg relevant. Because of limited resources, companies must frequently pass up profitable projects or alternatives. The profit or benefit forgone becomes an opportunity cost (even though it doesn’t show up anywhere on a financial statement) and such costs are relevant in decision making. Again, my two biggest pieces of advice for decision making: 1. Avoid making the very false assumption that all variable costs are relevant and all fixed costs are 7 irrelevant. 2. Make all calculations on a “tota ” revenue and cost basis; not a “per unit” revenue and cost basis. Just trust me on this one. (Per unit fixed costs change with changes in units, however total fixed costs do not. This is usually the cause of errors when students make calculation on a “per unit” basis.) l (Comm Goomeb' Accept or reject a special order or one-time-only order You are the CFO for MoonDollar Roasting which produces (roasts and packages) a popular coffee called LunaRoast, which you sell for $10 per pound. You have been approached by a retailer that wants to buy 5,000 pounds of LunaRoast coffee to send out as a one-time promotion, but only has $7 per pound in their promotion budget. Considering just qualitative factors, why might you do this? -P0%nt\?lj 3d a new CUSiuMU, Considering just qualitative factors, why might you not do this? 7;; fl é-rulj ct. 1 “if/Mt oralU, Do "fiufi onydskwvl ’Mai '34 4mg Lemma» a rajul‘d °~">i°“"" J0“ W.“ “’"U 5‘ NO? while (C (flour loyal (,Q'Sl‘OMQF‘} QM «Dell-7, These qualitative factors are very subjective. Before we start arguing over whether to say yes or no, let’s figure out how much we are saying yes or no to (the incremental profit or loss). So, strictly from a quantitative standpoint, based on the information above, should you do this? i LVN; A0 rclu. Nah Q00..ij .‘ nCorMah’o m, What if I told you the total per unit cost for a pound of LunaRoast coffee was $8.25? (\O [clack Daft/“)5 0o \Ql’Mrc/K L 0} i) ’llAalr’ Mal/Q1, d p 7‘1). (6.18 wt Favlzdcvxl“ and) “$450k 9mm: Here is some additional information for a pound of LunaRoast: Direct Materials $4.00 Direct Labor $1.00 Variable Manufacturing Overhead $0.75 (of which $0.25 is shipping) . 50 Fixed Manufacturing Overhead $2.50 Total Cost $8.257? .30 None of MoonDollar’s selling, general, and administrative costs are affected by the retailers offer. MoonDollar’s manufacturing plant has capacity for 15,000 pounds of LunaRoast. You are currently running at 60% capacity. If you say yes to the deal, the retailer said they will pick up the 5,000 pounds, so you wouldn’t have to ship the order. Should you take this one-time order or say no? How much money does your decision save/make over the alternative? (There is space on the top half of the next page for your calculations.) RAULM’ (0%“ QM umlrz-QSO é‘ooompo ~ $903 -v o : 1°50?) ' f: ’lln mad. «30>, Q\\ a, A All Rad 9050 +7 1 have A M ' M 9000 x “l 20000 AM 5‘1 @000 x l 90"” ' woo WOO+.§ Mlflloh 9AM Now let’s change just one little piece of information. Let’s say MoonDollar is currently running at 80% capacity. Should you take this one-time order or say no? How much money does your decision save/make over the alternative? AAA y” 127.2. Row M“ “‘0 7., (an) 2 \lcmooo ( +wash) - \390 \ ow AM NW \xgg-ft‘i‘iie season: (0.000 “000 (0% g; AM BL \gmifi : 1,6009 $.0an , AM \IMM lommsk gazebo) : (pace newcqy‘): $000 Ml Wall $7090 32000 “la A, féU€'\()¢a UMICL‘ woo/lJ fast) M Q AQ‘m/vxirfl anly quflmf'rl’awtfl’ catio‘gf 9100 9400M clog no lguadyz “pg “ecu IOXQ' §l£0m 30C) gqfa if WW #7096 551(“613 300 We“ (no? (JQA, Outsource a product or service (aka make-or-buy decision: Marcus Reese is the Controller at Kallen Corporation. Kallen Corporation is under intense cost competition. Reese has been asked to evaluate whether Kallen should continue to manufacture MTR— 20 or purchase it from Miville Company. Miville Company has submitted a bid to supply the 32,000 MTR—20 units that Kallen will need for 2010 at a price of $19.50 each. Kallen has capacity available to produce 32,000 units. From plant records and interviews with Bryan Tumley, the plant manager, Reese gathered the following information regarding Kallen’s costs to manufacture 32,000 units of MTR-20 in 2009: Costs for 32 000 units in 2009 Direct materials $208,000 Direct manufacturing labor $128,000 fm Plant space rental $84,000 + mama Equipment leasing (aka rental) $36,000 * 5i 009 Other manufacturing overhead $230,000 1' b 4W0 Total manufacturing costs $686,000 None of Kallen Corporation’s Selling, General, and Administrative costs will be affected by outsourcing MTR-20 to Miville Company. ' Additionally, Tumley tells Reese that: - Variable costs per unit in 2010 will be the same as variable costs per unit in 2009. - Plant rental and equipment lease are long-term contracts that are going to be expensive to wiggle out of. Tumley estimates it will cost $10,000 to terminate the plant rental contract and $5,000 to terminate the equipment lease contract. - 40% of the other manufacturing overhead is variable. - If MTR—20 is outsourced, 50% of the fixed component of other manufacturing overhead (supervisor salaries) can be avoided. - Kallen’s just-in—time policy means that inventory is immaterial. . Based solely on quantitative factors, should Reese recommend that MTR—2O be produced at Kallen or purchased from Miville? How much money would be saved compared to the alternative? "7 élvocowkmw 6%0‘97, 5. m “(03°63 .. 6 (90° M1 KL irx hW3°~ What are some qualitative factors against outsourcing? ,. Pfi‘b C(qd Cof‘yxfaij Mom(/ €U¢Jlb (antral CORQ &d\i’ ia\ it i3 Add or Drop a Service, Customer, Product, Department, Location, etc. It is January 1, 2009 and Day Street Deli’s owner, Bob Stoops, is disturbed by the poor profit performance of his ice cream counter. Bob just had a meeting with his accountant and said he is going to close the ice cream counter. Day Street Deli’s accountant had correctly given Bob the following Ice Cream Counter Division Income Statement for the year ended December 31, 2008 earlier in the day: Ice Cream Counter Sales $45,000 Less: COGS (milk, sugar, etc. - all variable) $20,000 Gross Profit ’ $25,000 Less: Operating Expenses Wages of ice cream counter personnel $12,000 Paper products (napkins, etc.) $4,000 Utilities $2,900 Depreciation of counter equipment and furnishings $2,500 ' Depreciation of building $4,000 Accountant’s salary $3,000 Total operating expenses $28,400 Loss on ice cream counter <$3,400> Some notes: - The Utilities expense for Day Street Deli is $11,600. Day Street Deli allocates 25% of utilities ($2,900) to the ice cream counter. ‘ - Day Street Deli’s ice cream counter equipment and furnishings have a salvage value of $0 but will still last for a long time. However, a company will come in and remove the ice cream counter equipment and furnishings for free if Day Street Deli decides to close down the ice cream counter. - The depreciation of the entire building is $16,000. Day Street Deli allocates 25% of the depreciation ($4,000) to the ice cream counter. - The accountant is a retired CPA and only works part time. His yearly salary is $12,000. Day Street Deli allocates 25% of his salary ($3,000) to the ice cream counter. - Bob is going to replace the ice cream counter with 4 vending machines which he estimates will earn him a profit of $750 a year each. (The overall utilities expense for Day Street Deli will be $11,600 whether there is an ice cream counter or vending machines.) Based on just quantitative factors, is Bob making the right decision? No, 1M, mach) 55,,“ (AWL uhli'l’x'bs View“) deprtcicJ-Jvk cvw‘ 0(600nh'ns C9,; “HP «FL :\(~w\'gr MAW. @ 63(055 Aérlsifi. .3535; Sake/3 ‘b’ooo (g was (Ioooo) 0 (Q Q); (11000) 1743M we i (“m”) 0 Vol J5 Mod/WW5 O 3090 01,000 '50 00 Which items in the GAAP financial statement above (which is done correctly) is irrelevant when making this decision? 001mb; Ali degrea‘ah’o fl/ quowi‘Qoé/ynkwb Joint Products: Sell or Process Further Joint Production Process— rim We, CoMl/jléwl Managed-ad?! 6C We at MOM, .Produoi’g {,‘MuH-cmeoucf I Callaol 3001+ Produofg} .' l 3 .. y \ Split-offpoint— mkug (“dz FIOJWCl’S choML (dem‘ltei’xb‘ (goo/fl QCLCK 0331/“, Jointcosts— Cowl-S ('A CQWM hetero, {‘42 SPIUWdu {,Omr. Management must frequently decide whether to sell the products at the split-off point or process them further into a higher quality good. ABC Dairy Inc. processes raw milk into cream and liquid skim. Raw milk is processed in 20,000 gallon batches. Below is some important information: Cost of 20,000 gallons of raw milk $5,000 Joint Production process of raw milk $6,000 Cream produced at split-off point 15,000 gallons Sales price of cream $0.50 per gallon Liquid skim produced at split-off point 5,000 gallons Sales price liquid skim $1.00 per gallon The CEO of ABC Dairy Inc. has recently been asked by a retailer if ABC Dairy Inc. would process the liquid skim further to make condensed milk, which the retailer would buy for $3 a gallon. The costs to turn 5,000 gallons of liquid skim into 5,000 gallons of condensed milk are $11,000. Should ABC Dairy Inc. further process the liquid skim into condensed milk or should they continue to sell liquid skim at the split-off point? L54): (\0 x 063 Slim (Rev, ‘9 so (0AA Kw. \SOOO 0 q] cm H”? gale» Srooo @7090 law Cefit'l’g To M / {009 q GOO Decisions involving Limited Resources Karampour Furniture produces and sells specialty mattresses. Production is a machine-intensive process. Karampour’s variable costs are direct material costs and variable machining costs. Fred Karampour, the owner, is planning production for the coming year and collects the following data: Estimated Selling $ DM & Var. Machining Machine hours demand (units) per unit cost per unit needed to make Nealy 1,800 $3,000 $1,500 3 '1"! 00006 Tersa 4,500 $2,100 $1,105 2.5 LN“! '1 ‘00 Pelta 39,000 $800 $380 1 H, 330 om. - All other marketing and administrative costs are fixed and, along with the fixed manufacturing costs, total $8,750,000. - Annual capacity is 50,000 machine-hours, which is limited by the availability of machines. — Karampour Furniture holds negligible inventories to minimize business risk. What is Karampour Furniture’s most profitable production levels of the three products? In other words, how much of each mattress should Karampour make? 1%00 Naqij V1000 pawn» «Ark Z'LqO Thick / . m (x R Edii‘mj pain, 30m 1000 8'00 UM ml L/Af‘ Mac}, my 5'00 1103’ 390 (earn). *quk m)? quo 5148’ 1410 Him/“7 #0 “HILL 5 1'5 ‘ CM fltr Magi/“(AL heufi SO?) "} 613 um Carde V300 X 3 30000 new; W4 361000 A l “W/ cam ‘ {GOO} M._n .,/ €000 210.0 x 1.3 W ' o KeyPoint- 0v Lrim{.\»c& [€500be is Prey/H”) a (OM/cm] aucootA Emma» “1141. yawn «Mount 00 cmm'burm My, Parr onr'al— a? flu: Sum“, rq270W(p/, ...
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This note was uploaded on 06/07/2011 for the course ACC 312 taught by Professor Welsh during the Spring '08 term at University of Texas at Austin.

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Chapter%206 - firm; UNIVERSITY or TEXAS AT AUSTEN MCCOMBS...

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