Chapter 11 Part 3

Relevant Costs for Non-Routine

Decision Making
 Shut Down or Continue Operation
Illustrative Problem 11-8
 
The ABC Company, now operating below 50% of its practical capacity
expects that the volume of sales will drop below the level of 5,000
units per month. An operating statement prepared for the monthly
sales of 5,000 units shows that following:

Sales (5,000 units at P3) P15,000

Less:
Variable costs (5,000 units at P2) P10,000
Non-variable costs 5,000 15,000 Net Income
-0-
 Shut Down or Continue Operation
(2)
Assume that a conservative estimate of costs if plant
operations are suspended indicates a shut-down cost
of P2,000 per month. Since there is no immediate
possibility of profit under present conditions, the
problem of the company is the possibility of
minimizing the loss.
 
Required: Determine if the company should shut down
temporarily or continue operations.
Shut Down or Continue Operation
Analysis: (3)
 
The decision to continue operations or shut
down will depend upon the expected sales of
the company in comparison with the shut
down point of 3,000 units computed as
follows:
 Shut Down or Continue Operation
(4 )
 
 
Fixed Costs if Shut down
Operations are - Cost
Continued
Shut down point= ____________________________
Contribution Margin per unit
 
= P5,000 - P2,000
P1
 
= 3,000 units
 Shut Down or Continue Operation
(5)
 
 
PRICING PRODUCT AND SERVICES
 Shut Down or Continue Operation
(6)
The pricing decision can be critical because...
1, The prices charge for a firms products
largely determine the quantities customers
are willing to purchase, and
2. The prices should be high enough to
cover all the cost of the firm.
 Shut Down or Continue Operation
(7)

COST-PLUS PRICING
 Shut Down or Continue Operation
(8)
The Cost-Plus Pricing Formula:

Target Selling Price = [Cost + (Mark-up

percentage X Cost)}
(9)
Procedures however may be costed in at least
two different ways:

1. By the absorption approach – where the

costs base is defined as the cost to
manufacture one unit and therefore excludes
all Selling, General and Administrative
Expense.
(10)

2. By the contribution approach – where cost

base consist of all the variable costs
associated with a product including selling,
general and administrative expenses.