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Unformatted text preview: 155 1515 No, the $60 per unit manufacturing cost which was incurred to produce the 40,000 barbeque grills is not relevant. This is a past cost. It has already been incurred and its total amount cannot be affected by a decision regarding to whom to sell the grills. The only costs and revenues which would be relevant are the future costs and revenues which differ between the alternatives. The following would be relevant : (1) Sales revenue (2) Sales promotion or advertising costs (3) Shipping costs (4) Storage and handling costs (5) Property taxes and insurance on the grills in inventory (6) Clerical costs associated with prolonged domestic sales 1516 Alternative 1: to store the rafts and sell them next year Sales 10,500* rafts @ $9 $94,500 Storage costs (8,500) Profit to be earned $86,000 *[15,000 (0.30 x 15,000)] = 10,500 rafts Alternative 2: to sell the rafts now Sales 15,000 rafts @ $6.20 $93,000 Advertising (15,000) Profit to be earned $78,000 It would be better for Water Works to store the rafts and sell them next year . Note that the manufacturing costs incurred prior to the time of the decision are "sunk" costs and are not relevant to the decision. 151 7 Incremental cost of driving to the plant 8 miles @ $0.25 $ 2 + Profit goal 10 Required total sales revenue to reach profit goal $12 Required total sales revenue Selling price per doughnut = Number of doughnuts sold $12 = 60 doughnuts* = $0.20 per doughnut *6 dozen 1 dozen workers will not pay for Note that the cost of the doughnuts is irrelevant to Roy's decision because it is a past (sunk) cost. ...
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This note was uploaded on 04/08/2008 for the course ACC 102 taught by Professor Drucker during the Fall '07 term at Coastal Carolina University.
- Fall '07