ACTG 333 Chapter 11 Class Notes January 14, 2014

Relevant cost
- Differ between alternatives
- Most variable costs are relevant, most fixed are not
Opportunity cost
- The cost saved or sacrificed for changing methods
Special order
- Unexpected, rare
- Customer driven
Make or Buy Decisions
- Make product
- Outsource
- Long and short term impacts
Theory of constraints (aka bottlenecks)
- Can I add more capacity?
- If not, how do I use what I have the best?
- Use of constrained resources
Predatory pricing
- Sell below cost until you have the market share then jack up their price
- Laws against killing off your competition with very low prices

Exercise 11-11
Buy it price = $35
Make it = $33 - $5 = $28
$35 - $28 = $7

11-12
10 sofas for $3000
So, $300 per sofa
DM and DL at $100
CM = $300 - $100 = $200
Most times, a positive contribution margin would mean yes, but you always have to think about
CAPACITY.

11-13
SP = $6 per lunch
VC = 2.50
FC = 2.50
Markup = $1
You have to sell for $2.50 (incremental cost) at least.

11-14
Repair cost = $1,000
10,000 * .50 = $5,000
$6,000
Replace:
Buy machine = $5,000
10,000*.25 = $2,500
$7,500
ACTG 333 Chapter 11 Class Notes January 14, 2014

11-15
Current CM = $100,000
We can eliminate $90,000
So we can save $90,000 but will lose our CM of $100,000.
$90,000 $100,000 = ($10,000) = do not get rid of division

11-16
You would decrease AA production to produce the AAA requested since AAA has higher CM.

11-17
Cost with machine $200,000
$5 * 10,000 $50,000
$250,000

Cost w/o machine:
$20 * 10,000 = $200,000

11-18
CM: 100,000 * .10 = $10,000
Rework: 100,000 * .05 = $5,000
Shipping = $1,000
$4,000

11-19
Normal Price:
1,000 / 500 = 2 per meal fixed + 3.50 per meal variable = 5.50
Special Order Rule:
Cover variable of $3.50

11-20
The house keeping cost is relevant in the short term.
In the long term all are relevant.