Buy decision lets look at another decision faced by

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Unformatted text preview: e or buy” decision. buy” decision. Let’s look at another decision faced by the Let’s look at another decision faced by the management of Worldwide Airways. management of Worldwide Airways. 14-20 Outsource a Product or Service Outsource • An Atlanta bakery has offered to supply the in-flight desserts for 21¢ each. • Here are Worldwide’s current cost for desserts: 14-21 Outsource a Product or Service Outsource Not all of the allocated fixed costs will be saved if Worldwide purchases from the outside bakery. 14-22 Outsource a Product or Service Outsource If Worldwide purchases the dessert for 21¢, it will only save 15¢ so Worldwide will have a loss of 6¢ per dessert purchased. Wow, that’s no deal! 14-23 Add or Drop a Service, Add Product, or Department One of the most important One of the most important decisions managers make is decisions managers make is whether to add or drop a whether to add or drop a product, service or product, service or department. department. Let’s look at how the concept Let’s look at how the concept off relevant costs should be o relevant costs should be used in such a decision. used in such a decision. 14-24 Add or Drop a Product Add Worldwide Airways offers its passengers the opportunity to join its World Express Club. Club membership entitles a traveler to use the club facilities at the airport in Atlanta. Club privileges include a private lounge and restaurant, discounts on meals and beverages, and use of a small health spa. 14-25 Add or Drop a Product Add Sales Less: Variable Costs: Food/Beverage Personnel Variable overhead Contribution Margin Less: Fixed Costs: Depreciation Supervisor salary Insurance Airport fees Allocated overhead Loss $200,000 $70,000 40,000 25,000 $30,000 20,000 10,000 5,000 10,000 (135,000) 65,000 ( 75,000) $ ( 10,000) 14-26 Add or Drop a Product Add KEEP CLUB ELIMINATE DIFFERENTIAL Sales $200,000 0 $200,000 Food/Beverage (70,000) 0 (70,000) Personnel (40,000) 0 (40,000) Variable overhead (25,000) 0 (25,000) Contribution Margin 65,000 0 65,000 D...
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This note was uploaded on 02/10/2014 for the course ACCT 331 taught by Professor Kline during the Fall '10 term at Drexel.

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