Example assume that buying the switches allows baron

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cost of alternative foregone. ° Example : Assume that buying the switches allows Baron to use the released capacity to generate $38,000 additional income.
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DeGrooteSchool.ca Baron, Inc.(cont.) - Opportunity Costs ° Thus, the $38,000 lost income is an additional cost of making the switches Make Buy NI Increase (Decrease) Total Annual Cost $225,000 $250.000 $25,000 Opportunity Costs $38,000 $0 $38,000 ------------ -------------- ------------ Total Costs $263,000 $250,000 $13,000 ° Decision: Based on this new changed analysis , Baron should buy the switches as the company will earn an additional $13,000 in Net Income.
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DeGrooteSchool.ca Sell or Process Further? ± Manufacturers may have to decide , at a given point in production, whether to sell now or to process further and sell at a higher price later ± Decision Rule Process further as long as the incremental revenue from such processing exceeds the incremental processing costs
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DeGrooteSchool.ca Single Product Case ± Cost to manufacture one unfinished table : Direct materials $15 Direct labour 10 Variable manufacturing overhead 6 Fixed manufacturing overhead 4 Manufacturing cost per unit $35 Selling price of unfinished unit is $50 ± Unused capacity is available to enable the company to finish the tables Selling price of finished unit is $60
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DeGrooteSchool.ca Single Product Case (cont.) ° Relevant unit costs of finishing tables : Direct materials increase $2 Direct labour increase $4 Variable manufacturing overhead costs increase by $2.40 (60% of direct labour increase) Fixed manufacturing costs will not increase
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DeGrooteSchool.ca Single Product case (cont.) Decision: Process further . Why? Incremental revenue $10 exceeds Incremental processing costs of $8.40 As, Income increases by $1.60 per unit .
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DeGrooteSchool.ca Sell or Process Further: Multi-product Case ± Appropriate when multiple products are produced simultaneously ± Many end-products are produced from a single raw material and a common production process ± Joint products – multiple end products Petroleum – gasoline, lubricating oil, kerosene Meat Packing – meat, hides, bones
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DeGrooteSchool.ca Multi-product case (cont.) ± Joint costs All costs incurred prior to Split-off point Normally, allocate to individual products based on relative sales value ± Sunk costs already incurred and cannot be changed Irrelevant for sell or process further decisions ± Joint costs are Sunk costs for Sell or Process further decisions .
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  • Fall '19
  • Incremental Analysis, Baron, Inc., Incremental Analyses

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