Suppl note re types of rel_cost decisons

Suppl note re types of rel_cost decisons - ACCT1130 -...

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ACCT1130 - Supplementary Notes - Types of Relevant Cost Decisions 1. Accept/Reject a Special Order Special orders are one-time orders from non-regular customers usually at a price below normal selling price. They may be orders for “generic” or no-name products. The business would normally only consider accepting the special order if the following conditions are met: The incremental (relevant) revenue on the order exceeds the incremental (relevant) cost. Accepting the order will not disrupt regular markets or customers. Also, the business should normally have excess capacity available; otherwise, they would have to give up regular business at normal selling prices in order to accept the special order. (Any margin given up on regular business in order to accept the special order would be considered an opportunity cost.) The minimum acceptable price for a special order = the total relevant costs of the order per unit plus any opportunity cost (if applicable), divided by the number of units in the order. E12-4, E12-10, P12-27, P1, P5, P13, P18, P19, P24, P31 2. Make v. Buy a Part or Component For this type of problem, we usually list the relevant cost of making the part (DM, DL, variable overhead, and any additional fixed costs), and then we list the relevant cost of buying outside (total purchase cost). The business should make the part as long as the relevant cost of making the part is < the cost of buying outside. Qualitative factors affecting the decision include a desire to have better control over the quality of the part and more control over the delivery to the production area when the part is made “in-house”. Sometimes, if the part is purchased outside, part of the plant facility can be freed-up for other uses. This freed-up space could be sublet to others to earn rental income, or could be used to make another product on which product margin is earned. Such amounts are considered to be “opportunity costs” and can be regarded either as a reduction in the relevant cost of buying outside, or as an additional cost of making in- house. The maximum price per unit you would be willing to pay to purchase outside = the
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Suppl note re types of rel_cost decisons - ACCT1130 -...

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