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Week 9 ACCY 111 RJD Lecture 5

Variable costs per sliced white loaf 6 attributable

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Variable costs per sliced white loaf $6 Attributable fixed costs $1 $7 External purchase cost $5 Savings per loaf $2 Savings for 1000 loaves a week $2,000
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Make or Buy – spare capacity Better Bakers should accept the offer and outsource the production of white loaves. Better Bakers Forecast Sliced White Loaf Brown Loaf Wholemeal Loaf Total Selling Price 8.00 10.00 12.00 Sales 8,000 15,000 24,000 47,000 Variable Costs 5,000 9,000 20,000 34,000 Contribution 3,000 6,000 4,000 13,000 Attributable Fixed Costs 3,000 1,000 4,000 Apportioned Fixed Costs 3,000 1,000 4,000 Profit 3,000 - 2,000 5,000
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Make or Buy – spare capacity Variable costs of making 6 Additional costs of buying 5 $ (1) Variable costs saved by buying (1,000) Fixed costs saved by buying (1,000) Total costs saved of buying $ (2,000)
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Make or Buy – no spare capacity What if there were a fourth loaf, a Farmers loaf, that used the same production facilities as the Wholemeal Loaf? In other words at full capacity Farmers loaves can only be made at the cost of making fewer Wholemeal loaves. If Bread Bin Bakery can also make Farmers Loaves for Better Bakers at a cost of $12, should they accept that offer?
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Make or Buy – no spare capacity Better Bakers Forecast Wholemeal Loaf Farmers Loaf Selling Price 12.00 13.00 Variable costs - materials 6 4 - labour 4 4 $ 10 $ 8 Contribution $ 2 $ 5 Variable Farmers Loaf costs 8 Lost Wholemeal Loaf contribution 2 $ 10 Additional cost of buying $ 12
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Make or Buy Assuming the organisation has spare capacity: is the external cost more than the internal variable cost? Assuming the organisation has no spare capacity: it must sacrifice part of its existing output to produce more of one product (or a new product). is the external cost more than the internal variable cost and the lost contribution from an existing product?
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Qualitative Factors Qualitative factors that cannot be quantified in terms of costs and profits may also affect decisions, e.g. : what is the relationship between different products? what impact will decisions have on employee morale? how will competitors respond? is their any pending new legislation or possible regulation by national or local government?
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Summary: An Introduction to Decision- making Past (historical) costs may be helpful as a basis for making predictions. However, past costs themselves are always irrelevant when making decisions. Different alternatives can be compared by examining differences in expected total future revenues and costs.
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Summary: An Introduction to Decision- making Not all expected future revenues and costs are relevant. Expected future revenues and costs that do not differ across alternatives are irrelevant and therefore can be eliminated from the analysis. Due weight must be given to non financial quantitative factors and qualitative factors.
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Next time Making investment decisions Please read chapter 11
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Variable costs per sliced white loaf 6 Attributable fixed...

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