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# 041410_for_posting - On dropping a division Consider the...

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On dropping a division Consider the following statements: I. A division’s net operating income, after deducting both traceable and allocated common corporate costs, is negative. II. The division’s avoidable fixed costs exceed its contribution margin. III. The division’s traceable fixed costs plus its allocated common corporate costs exceed its contribution margin. Which of the above statements give an economic reason for eliminating the division? A. Only I and II B. Only IC. Only II D. Only III Kattelus - Spring 2010 1

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ABI-WE 5 helpful hints 1. Use requirements 3 and 5 together. Create a calculated item called July forecast that shows July is 1.2X higher than June sales (where x is the last digit of your PID). 2. Use if/then/else for computing variable training expenses. See cost info #2 -- Hint: [IF(SALES>2,000,000, SALES*1%,0)]. 3. Requirement 1d, if/then/else not necessary for printing expenses. Kattelus - Spring 2010 2
Kattelus - Spring 2010 3 Conceptual Issues Should you use the differential approach or total cost approach to analyzing a “relevant cost” decision problem? In the differential approach : Only the relevant costs are considered In the total cost approach: All the revenue and all the costs are considered in the form of an income statement. Then compare the differences in net operating income between the two alternatives.

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Kattelus - Spring Manager’s Dilemma: Decision Rule: Replace equipment? If the incremental costs of the new equipment are less than the incremental costs of the old Use a constrained resource? Produce as much of the product that has the higher contribution margin per unit of constrained resource as demanded, and then use the remaining capacity to produce as much of the other products as possible Continue to process a joint product after the cut-off point? If the incremental revenues after further processing exceed the incremental costs of more processing
DEMO: Replace Old Equipment with New?

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041410_for_posting - On dropping a division Consider the...

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