Chpt_8_outline-v2

Chpt_8_outline-v2 - CHAPTER 8 SHORT TERM BUSINESS DECISIONS...

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CHAPTER 8 – SHORT TERM BUSINESS DECISIONS Relevant versus Irrelevant Information Relevant – 1. Allows a decision maker to distinguish between two alternatives 2. Future-oriented Prime example: Irrelevant – “unavoidable” Prime example: sunk costs Qualitative versus Quantitative information Opportunity costs Not cumulative
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Utilizing information in special decisions Generally, when encountering a “special decision” or ad hoc problem, you should follow two steps: 1. The incremental approach 2. Consider qualitative characteristics We will consider four types of special decisions: 1. Special orders 2. Pricing 3. Product mix under capacity constraints 4. Outsourcing We will NOT examine product / segment discontinuation, or sell-as-is / process further decisions 1. Special orders Companies often receive offers from customers to purchase large quantities of a product below the selling price. Some important considerations: DECISION RULE: Look at the DDI problem.
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2. Pricing decisions Companies must figure out a price to set. While the assumptions behind the decisions are discussed and researched extensively by marketers, the accountants play a pivotal role in translating marketing assumptions to profits, and ultimately the decision will hinge on profits. Important considerations: o Price-takers – o Price-setters – Target pricing Since these are usually price-takers, and shareholders tend to demand a certain level of profit, managers must focus on controlling the costs. The equation is: The target full cost includes ALL activities in the entrepreneurial script, not just GAAP (i.e., manufacturing) costs E.g. See Handy Appliance Company
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Davis Driveways, Inc. Davis Driveways, Inc. (DDI) pours concrete driveways for single family homes. DDI uses a cost-plus pricing approach. The company’s accountant prepared the following report showing how DDI established the price per driveway at $350. Materials $100 Labor $120 Overhead** $80 Total cost $300 Desired profit $50 Sales price $350 ** Overhead consists of rent of the corporate  office and supervisory salaries, totalling  $80,000 annually.  The normal volume is  1,000 driveways per unit.  The relevant range  is from 800 units to 1,500 units. A new builder in town, Rachel Rodgers, has acquired a large tract of land upon which she intends to build 200 single family homes. Ms. Rodgers offers to purchase all 200 driveways from DDI. However, she is willing to pay only $250 per driveway. Required Assume you are consultants for the DDI, and DDI asks you whether they should accept or reject Ms. Rodgers’ offer. Support your recommendation with appropriate computations. Also suggest some qualitative issues which might be considered by DDI before making the decision.
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Solution Quantitative factors – examine relevant revenues and costs: Revenue: $250 per driveway Costs: Direct materials $100 per driveway Direct labor $120 per driveway TOTAL $220 per driveway
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This note was uploaded on 10/08/2011 for the course ACCT 101 taught by Professor Kang during the Spring '08 term at S.F. State.

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Chpt_8_outline-v2 - CHAPTER 8 SHORT TERM BUSINESS DECISIONS...

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