0729--01 - Baseline profit function (without DE plan...

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Relevant costing: Sell-or-process decisions Relevant costs and revenues with respect to a given decision are those changes in costs and revenues likely result from that decision. A business decision, in simplest form, is a choice between (1) implementing a given plan, and (2) not implementing a given plan. Spartan Bike Company example (p. 93) In this example, the firm must decide whether to sell its mountain bike product either (1) before durability enhancement, or (2) after durability enhancement; noting that both revenues and costs are likely to change as a result of choosing to implement the durability enhancement option . This implies that the choice to sell the mountain bike product before durability enhancement is a choice of not implementing the durability enhancement (DE) option. Therefore, relevant costs and revenues are, by definition, those costs and revenues that are likely to result only (and specifically) from the durability enhancement option.
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Unformatted text preview: Baseline profit function (without DE plan implementation) P R C R ( ) TVC FC P( ) X . SP X ( ) . VC X FC P( ) X . 150 X ( ) . 85 X FC . 65 X FC P( ) 7500 . 65 ( ) 7500 FC 487500 FC Relevant costs and revenues from DE plan implementation ∆ P de ∆ R de ∆ C de ∆ P de ( ) X . ∆ SP de X . ∆ VC de X ∆ FC de ∆ P de ( ) X . SP de SP X . VC de VC X FC de FC ∆ P de ( ) X . ( ) 250 150 X ( ) . ( ) 135 85 X 20000 ∆ P de ( ) X . 50 X 20000 ∆ P de ( ) 7500 . 50 ( ) 7500 20000 355000 Decision > ∆ P de ( ) 7500 355000 => Choose to implement DE option. ν Graph X .. , 0 250 7500 FC 100000 [Assumed fixed cost level without DE option.] P( ) X . 65 X FC [Baseline profit function without DE option.] ∆ P de ( ) X . SP de SP X . VC de VC X FC de FC P de ( ) X . SP de X . VC de X FC de P de ( ) X . ( ) 250 135 X ( ) FC 20000 [P-function with DE option.] 1000 2000 3000 4000 5000 6000 7000 P( ) X P de ( ) X X...
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This note was uploaded on 01/13/2012 for the course ACC 202 taught by Professor Sue during the Fall '10 term at Michigan State University.

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0729--01 - Baseline profit function (without DE plan...

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