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Decision Making: Relevant Costs and Benefits: Mcgraw-Hill/Irwin
Decision Making: Relevant Costs and Benefits: Mcgraw-Hill/Irwin
Decision Making: Relevant Costs and Benefits: Mcgraw-Hill/Irwin
Decision
Making:
Relevant Costs
and Benefits
McGraw-Hill/Irwin
Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objective 1
14-2
14-2
Cross-functional
Cross-functional
management
management teams
teams
who
who make
make
production,
production, marketing,
marketing,
and
and finance
finance decisions
decisions
Make
Make substantive
substantive
economic
economic decisions
decisions
affecting
affecting operations
operations
14-3
Quantitative
Analysis
3.
3. Identify
Identify the
the Alternatives
Alternatives
4.
4. Develop
Develop aa Decision
Decision Model
Model
5.
5. Collect
Collect the
the Data
Data
6.
6. Make
Make aa Decision
Decision
14-4
Learning Objective 2
14-5
14-5
Primarily the
responsibility of the
managerial
accountant.
Information
Information should
should be:
be:
1.
1. Relevant
Relevant
2.
2. Accurate
Accurate
3.
3. Timely
Timely
6. Make a Decision
14-6
Qualitative
Qualitative
Considerations
Considerations
Accurate
Accurate
Information
Information must
must
be
be precise.
precise.
Timely
Timely
Available
Available in
in time
time
for
for aa decision
decision
6. Make a Decision
14-8
Learning Objective 3
14-9
14-9
Relevant Information
Information is relevant to a decision
problem when . . .
1.
1.
2.
2.
It
It has
has a
a bearing
bearing on
on the
the future,
future,
It
It differs
differs among
among competing
competing
alternatives.
alternatives.
14-10
Learning Objective 4
14-11
14-11
Identifying Relevant
Costs and Benefits
Sunk
Sunk costs
costs
Costs
Costs that
that have
have already
already been
been incurred.
incurred. They
They do
do
not
not affect
affect any
any future
future cost
cost and
and cannot
cannot be
be
changed
changed by
by any
any current
current or
or future
future action.
action.
Relevant Costs
$$ 15,000
15,000
45,000
45,000
11
$$100,000
100,000
25,000
25,000
5,000
5,000
80,000
80,000
11
14-13
Relevant Costs
IfIf we
we keep
keep the
the old
old loader,
loader, we
we will
will have
have depreciation
depreciation
costs
costs of
of $25,000.
$25,000. IfIf we
we replace
replace the
the old
old loader,
loader,
we
we will
will write-off
write-off the
the $25,000
$25,000 when
when sold.
sold. There
There is
is
no
no difference
difference in
in the
the cost,
cost, so
so itit is
is not
not relevant
relevant..
We
We will
will only
only have
have depreciation
depreciation on
on the
the new
new loader
loader
ifif we
we replace
replace the
the old
old loader.
loader. This
This cost
cost is
is relevant
relevant..
The
The $5,000
$5,000 proceeds
proceeds will
will only
only be
be realized
realized ifif we
we
replace
replace the
the old
old loader.
loader. This
This amount
amount is
is relevant
relevant..
The new loader will be depreciated in one year.
14-14
Relevant Costs
The
The difference
difference in
in operating
operating costs
costs is
is relevant
relevant
to
to the
the immediate
immediate decision.
decision.
14-15
Relevant Costs
Here is an analysis that includes only
relevant costs:
14-16
Learning Objective 5
14-17
14-18
A
A travel
travel agency
agency offers
offers Worldwide
Worldwide
Airways
Airways $150,000
$150,000 for
for a
a round-trip
round-trip flight
flight
from
from Hawaii
Hawaii to
to Japan
Japan on
on a
a jumbo
jumbo jet.
jet.
Worldwide
Worldwide usually
usually gets
gets $250,000
$250,000 in
in
revenue
revenue from
from this
this flight.
flight.
The
The airline
airline is
is not
not currently
currently planning
planning to
to
add
add any
any new
new routes
routes and
and has
has two
two planes
planes
that
that are
are idle
idle and
and could
could be
be used
used to
to meet
meet
the
the needs
needs of
of the
the agency.
agency.
The
The next
next screen
screen shows
shows cost
cost data
data
developed
developed by
by managerial
managerial accountants
accountants at
at
Worldwide.
Worldwide.
14-19
Since
Since the
the charter
charter will
will contribute
contribute to
to fixed
fixed costs
costs and
and
Worldwide
Worldwide has
has idle
idle capacity,
capacity, the
the company
company should
should
accept
accept the
the flight.
flight.
14-21
14-22
14-24
14-25
14-26
14-27
14-28
$200,000
(135,000)
65,000
( 75,000)
$ ( 10,000)
14-31
14-32
Conclusion
KEEP THE CLUB OPEN!
Contribution margin from
general airline operations
that will be forgone if club
is eliminated . . . . . . . . . . . $ 60,000
Profit/Loss
$ 40,000
Monthly profit of
KEEPING the club open
0
0
$ 60,000
$ 40,000
$100,000
=======
Learning Objective 6
14-36
Special Decisions in
Manufacturing Firms
Joint
Joint Products:
Products:
Sell
Sell or
or Process
Process Further
Further
A
A joint
joint production
production process
process resulting
resulting in
in two
two or
or
more
more products.
products. The
The point
point in
in the
the production
production
process
process where
where the
the joint
joint products
products are
are
identifiable
identifiable as
as separate
separate products
products is
is called
called the
the
split-off
split-off point.
point.
14-37
Joint Processing
of Cocoa Bean
Cocoa beans
costing $500
per ton
Joint Production
process costing
$600 per ton
Cocoa butter
sales value
$750 for
1,500 pounds
Split-off point
Cocoa powder
sales value
$500 for
500 pounds
Separable
process
costing
$800
Instant cocoa
mix sales value
$2,000 for
500 pounds
14-38
Joint Products
Relative Sales Value Method
$750
$750 $1,250
$1,250 == 60%
60%
60%
60% $1,100
$1,100 == $660
$660
14-39
Joint Products
Cocoa butter is sold at the end of the joint
processing.
Cocoa powder may be sold now or
processed into instant cocoa mix. Further
processing costs of $800 will be incurred if
the company elects to make instant cocoa
mix.
14-40
Joint Products
(
Firms
Firms often
often face
face the
the problem
problem of
of deciding
deciding how
how
limited
limited resources
resources are
are going
going to
to be
be used.
used.
Usually,
Usually, fixed
fixed costs
costs are
are not
not affected
affected by
by this
this
decision,
decision, so
so management
management can
can focus
focus on
on
maximizing
maximizing total
total contribution
contribution margin.
margin.
Lets
Lets look
look at
at the
the Martin,
Martin, Inc.
Inc. example.
example.
14-42
Limited Resources
Martin, Inc. produces two products and selected
data are shown below:
14-43
Limited Resources
The
The lathe
lathe is
is the
the scarce
scarce resource
resource because
because there
there
is
is excess
excess capacity
capacity on
on other
other machines.
machines. The
The
lathe
lathe is
is being
being used
used at
at 100%
100% of
of its
its capacity.
capacity.
The
The lathe
lathe capacity
capacity is
is 2,400
2,400 minutes
minutes per
per week.
week.
Should
Should Martin
Martin focus
focus its
its efforts
efforts
on
on Webs
Webs or
or Highs?
Highs?
14-44
Limited Resources
Highs
Highs should
should be
be emphasized.
emphasized. ItIt is
is the
the more
more valuable
valuable
use
use of
of the
the scarce
scarce resource,
resource, the
the lathe,
lathe, yielding
yielding aa
contribution
contribution margin
margin of
of $30
$30 per
per minute
minute as
as opposed
opposed to
to
$24
$24 per
per minute
minute for
for the
the Webs.
Webs.
If there are no other considerations, the best plan would be to produce to meet current
14-45
demand for Highs and then use remaining capacity to make Webs.
Limited Resources
Lets see how this plan would work.
Allotting the Scarce Resource The Lathe
Weekly demand for Highs
2,200 units
Time required per unit
x .50 minutes
Time required to make Highs 1,100 minutes
Total lathe time available
Time used to produce Highs
Time available for Webs
Time required per unit
Production of Webs
2,400 minutes
1,100 minutes
1,300 minutes
x 1.00 minute
1,300 units
14-46
Limited Resources
According to the plan, Martin will produce 2,200
Highs and 1,300 Webs. Martins contribution
margin looks like this.
The
The total
total contribution
contribution margin
margin for
for Martin,
Martin, Inc.
Inc. is
is $64,200.
$64,200.
Any
Any other
other combination
combination would
would result
result in
in less
less contribution.
contribution.
14-47
Theory of Constraints
Binding constraints can limit a companys
profitability.
Outsource
Retrain employees
Work overtime
Uncertainty
One
One common
common technique
technique for
for addressing
addressing the
the impact
impact
of
of uncertainty
uncertainty is
is
sensitivity
sensitivity analysis
analysis -- aa way
way to
to determine
determine what
what
would
would happen
happen in
in aa decision
decision analysis
analysis ifif aa key
key
prediction
prediction or
or assumption
assumption proved
proved to
to be
be wrong.
wrong.
14-49
Expected Values
From the last example, recall the contribution
margin for Webs was $24 and $15 for Highs.
Due to uncertainty, assume Martin has the following
probable contribution margins for the two products.
Webs
Highs
Martin
Martin would
would use
use the
the expected
expected value
value
contribution
contribution margins
margins in
in its
its decision
decision about
about
utilizing
utilizing its
its limited
limited resource
resource -- the
the lathe.
lathe.
14-50
Learning Objective 7
14-51
Short-Run
Short-Run
Versus
Versus
Long-Run
Long-Run
Decisions
Decisions
14-52
Allocated
fixed costs.
Unitized
fixed costs.
Opportunity
costs.
14-53
End of Chapter 14
14-54