Husseinkhasharmeh drhusseinkhasharmeh when

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Unformatted text preview: choose the third 3. alternative? alternative? Opportunity cost is $60,000 Let us analyze the income effects of choosing alternative (3) Let Revenue $500,000 Costs: Costs: Outlay Costs (400,000) Outlay Financial benefit before opportunity costs $100,000 Financial Opportunity cost of machine (60,000) Net financial benefit $ 40,000 Dr. Hussein Khasharmeh Dr. Hussein Khasharmeh When considering only two alternatives, a manager When might use straight forward differential analysis or opportunity cost analysis. The two approaches are equivalent. equivalent. Example, consider Maria Movales, a certified public accountant employed by a large accounting firm for a salary of $60,000/year. She is considering an alternative use of her time to have her own independent accounting practice. The new business will gain $200,000 a year and the additional outlay (operating expenses) is 120,000. Show the income effects? effects? Dr. Hussein Khasharmeh Dr. Hussein Khasharmeh The answer: Alternatives under consideration Alternatives Remain an open her independent difference employee practice employee Revenues $60,000 $200,000 $140,000 Revenues Outlay cost 120,000 120,000 120,000 120,000 Income effect/year $60,000 $80,000 $20,000 Income $60,000 $80,000 $20,000 The income effect is $20,000 more than her salary with the firm. The Considering the term opportunity cost, the analysis is: Alternative chosen Alternative Independent practice Independent Revenues $200,000 Expenses: outlay costs 120,000 outlay opportunity cost 60,000 180,000 60,000 Income effects per year $20,000 Note that each method produces the same answer $20,000. Note Dr. Hussein Khasharmeh Dr. Hussein Khasharmeh Make­or­Buy Decisions Managers often must decide whether to produce a product or Managers often must decide whether to produce a product or service within the firm or purchase it from an outside supplier. service within the firm or purchase it from an outside supplier. A key factor in deciding whether to make or buy is the A key factor in deciding whether to make or buy is the relevant cost and whether there are idle facilities.. relevant cost and whether there are idle facilities Dr. Hussein Khasharmeh Dr. Hussein Khasharmeh Example for Make or Buy Decisions Assume the following information: Nantucket Nectars Company’s Cost of Making 1,000,000 12­ounce glass Bottles are: Total Per unit Total Per unit Direct material $ 60,000 $.06 Direct material $ 60,000 $.06 Direct labor 20,000 .02 Direct labor 20,000 .02 Variable factory overhead 40,000 .04 Variable factory overhead 40,000 .04 Fixed factory overhead 80,000 .08 Fixed factory overhead 80,000 .08 Total costs $200,000 $.20 Total costs $200,000 $.20 Dr. Hussein Khasharmeh Dr. Hussein Khasharmeh Assume another manufacturer offers to sell Assume another manufacturer offers to sell Nantucket the bottles for $.18/bottle. Nantucket the bottles for $.18/bottle. If the company buys the bottles, $50,000 of fixed If the company buys the bottles, $50,000 of fixed overhead cost would be eliminated and the capacity overhead cost would be eliminated and the capacity now used to make Bottles...
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