Ch.7 - Relevant Costs and Product Planning Decisions ACIS...

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Click to edit Master subtitle style Relevant Costs and Product Planning Decisions ACIS 2116 - Chapter Seven
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Short-term Business Decisions v Examples of short-term business decisions that managers must make: v Should a special order be accepted? If so, how should it be priced? v Should labor be outsourced? v Should a product be added or dropped? v Should a product be made by the company or purchased from another company? v Should a product be sold as is or processed further?
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Short-term Business Decisions ¢ Managers need accounting information to make short-term business decisions. ¢ Managers focus on relevant costs and benefits. ¢ Relevant costs and benefits differ among alternatives. ¢ Managers analyze fixed and variable costs separately.
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Very Important Point! ¢ Although the problems in this chapter focus on profitability, in real life, managers must also focus on nonfinancial or qualitative factors. ¢ For example, managers must consider the effect of their decisions on: l their employees l their regular customers l the local community l the environment
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Special Order v One time order v Short-run pricing decision v Must have excess capacity v Must consider: v Relevant incremental costs and benefits v Qualitative factors
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Special Orders v Hokie Corp. makes a single product that has a normal selling price of $20 per unit. v A foreign company offers to purchase 3,000 units for $10 per unit. v This is a one-time order that would not affect the company’s regular business. v Annual capacity is 10,000 units, but Hokie Corp. is currently producing and selling only 5,000 units. Should Hokie Corp. accept the offer?
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Special Orders – Calculation of Variable Cost per Unit Obj10 Variable cost per unit = $8 ($40,000 ÷ 5,000 units)
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Special Orders If Hokie accepts the offer, net operating income will increase by $6,000. Increase in revenue (3,000 × $10) 30,000 $ Increase in costs (3,000 × $8 variable cost) 24,000 Increase in net income 6,000 $ Note: This answer assumes that fixed costs are unaffected by the order and that variable marketing costs must be incurred on the special order.
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Test Your Knowledge l VT Optical, Inc. ordinarily sells the T-lens for $50. Direct materials cost per unit is $5 and direct labor cost per unit is $3. Variable manufacturing overhead cost per unit is $2, fixed manufacturing overhead cost per unit is $18, and variable selling cost per unit is $1. A customer has requested a special order for 10,000 units of the T-lens to be imprinted with the customer’s logo. This special order would not involve any selling costs, but VT Optical would have to purchase a special imprinting machine for $50,000.
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Test Your Knowledge l What is the minimum price which VT Optical should accept for the T-lens if VT Optical wishes to earn a profit of $100,000? Assume there is sufficient idle capacity to fulfill the order and the imprinting machine has no further use after this order.
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Ch.7 - Relevant Costs and Product Planning Decisions ACIS...

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