6The Meaning of Relevance Relevant costs and relevant revenues areexpected future costs and revenues thatdiffer among alternative courses of action.Historical costsSunk costsDifferential incomeDifferential costs
7Distinguish between quantitative and qualitative factors in decisions. Learning Objective 3Distinguish between quantitativeand qualitative factors in decisions.
8Quantitative and Qualitative Relevant Information Quantitative factorsFinancialNonfinancialQualitative factors
9One-Time-Only Special Order Example The Bismark Co. manufacturing plant has aproduction capacity of 44,000 towels each month.Current monthly production is 30,000 towels.Costs can be classified as either variable or fixedwith respect to units of output.
10One-Time-Only Special Order Example Variable FixedCosts CostsPer Unit Per UnitDirect materials $6.50 $ -0-Direct laborManufacturing costsTotal $8.50 $5.00
11One-Time-Only Special Order Example Total fixed direct manufacturing labor is $45,000.Total fixed overhead is $105,000.Marketing costs per unit are $7($5 of which is variable).What is the full cost per towel?
12One-Time-Only Special Order Example Variable ($ $5.00): $13.50Fixed:Total $20.50A hotel in San Juan has offered to buy5,000 towels from Bismark Co. at$11.50/towel for a total of $57,500.No marketing costs will be incurred.
13One-Time-Only Special Order Example What are the relevant costs of making the towels ?$8.50 × 5,000 = $42,500 incremental costsWhat are the incremental revenues ?$57,500 – $42,500 = $15,000
14Beware of two potential relevant-cost analysis. Learning Objective 4Beware of two potentialproblems inrelevant-cost analysis.
15Two Potential Problems in Relevant-Cost Analysis 12Incorrect generalassumptions:Misleadingunit-cost data:All variable costsare relevant.Includeirrelevant costs.All fixed costsare irrelevant.Use same unitcosts at differentoutput levels.
16Outsourcing versus Insourcing Outsourcing ispurchasing goodsand services fromoutside vendors.Insourcing isproducing goodsor providing serviceswithin the organization.
17Make-or-Buy Decisions Example Bismark Co. also manufactures bath accessories.Management is considering producing a part itneeds (#2) or buying a part producedby Towson Co. for $0.55.
18Make-or-Buy Decisions Example Bismark Co. has the following costsfor 150,000 units of Part #2:Direct materials $ 28,000Direct labor ,500Mixed overhead ,000Variable overhead ,000Fixed overhead ,000Total $120,500
19Make-or-Buy Decisions Example Mixed overhead consists of materialhandling and setup costs.Bismark Co. produces the 150,000 unitsin 100 batches of 1,500 units each.Total material handling and setup costsequal fixed costs of $9,000 plus variablecosts of $200 per batch.
20Make-or-Buy Decisions Example What is the cost per unit for Part #2?$120,500 ÷ 150,000 units = $0.8033/unitShould Bismark Co. manufacture the partor buy it from Towson Co.?
21Make-or-Buy Decisions Example Bismark Co. anticipates that next year the150,000 units of Part #2 expected to besold will be manufactured in 150batches of 1,000 units each.
22Make-or-Buy Decisions Example Variable costs per batch are expected todecrease to $100.Bismark Co. plans to continue to produce150,000 next year at the same variablemanufacturing costs per unit as this year.Fixed costs are expected to remain thesame as this year.
23Make-or-Buy Decisions Example What is the variable manufacturing cost per unit?Direct material $28,000Direct labor ,500Variable overhead ,000Total $61,500$61,500 ÷ 150,000 = $0.41 per unit
24Make-or-Buy Decisions Example Expected relevant cost to make Part #2:Manufacturing $61,500Material handling and setups ,000*Total relevant cost to make $76,500*150 × $100 = $15,000Cost to buy: (150,000 × $0.55) $82,500Bismark Co. will save $6,000 by making the part.
25Make-or-Buy Decisions Example Now assume that the $9,000 in fixed clericalsalaries to support material handling andsetup will not be incurred if Part #2 ispurchased from Towson Co..Should Bismark Co. buy the part or make the part?
26Make-or-Buy Decisions Example Relevant cost to make:Variable $76,500Fixed ,000Total $85,500Cost to buy: $82,500Bismark would save $3,000 by buying the part.
27Explain the opportunity-cost used in decision making. Learning Objective 5Explain the opportunity-costconcept and why it isused in decision making.
28Opportunity Costs, Outsourcing, and Constraints Assume that if Bismark buys the part fromTowson, it can use the facilities previouslyused to manufacture Part #2 to producePart #3 for Krysta Company.The expected additional future operatingincome is $18,000.What should Bismark Co. do?
29Opportunity Costs, Outsourcing, and Constraints Bismark Co. has three options regarding Krysta:1. Make Part #2 and do not make Part #3.2. Buy Part #2 and do not make Part #3.3. Buy the part and use the facilities to producePart #3.
30Opportunity Costs, Outsourcing, and Constraints Expected cost of obtaining 150,000 parts:Buy Part #2 and do not make Part #3: $82,500Buy Part #2 and make Part #3:$82,500 – $18,000 = $64,500Make Part #2: $76,500
31Opportunity Costs, Outsourcing, and Constraints Opportunity cost is the contribution to incomethat is forgone (rejected) by not using alimited resource in its next-best alternative use.
32Opportunity Costs, Outsourcing, and Constraints Assume that annual estimated Part #2requirements for next year is 150,000.Cost per purchase order is $40.Cost per unit when each purchase is1,500 units = $0.55.Cost per unit when each purchase is equalto or greater than 150,000 = $0.54.
33Opportunity Costs, Outsourcing, and Constraints Average investment in inventory is either:(1,500 × .55) ÷ 2 = $ or(150,000 × $0.54) = $40,500Annual interest rate for investment ingovernment bonds is 6%.$ × .06 = $24.75$40,500 × .06 = $2,430
34Opportunity Costs, Outsourcing, and Constraints Option A: Make 100 purchases of 1,500 units:Purchase order costs: (100 × $40) $ 4,000.00Purchase costs: (150,000 × $0.55) $82,500.00Annual interest income: $Relevant costs: $86,524.75
35Opportunity Costs, Outsourcing, and Constraints Option B: Make 1 purchase of 150,000 units:Purchase order costs: (1 × $40) $Purchase costs: (150,000 × $0.54) $81,000Annual interest income: $ 2,430Relevant costs: $83,470
36Know how to choose which products to produce when there Learning Objective 6Know how to choose whichproducts to produce when thereare capacity constraints.
37Product-Mix Decisions Under Capacity Constraints Per unit Product #2 Product #3Sales price $ $14.50Variable expensesContribution margin $ $ 0.60Contribution margin ratio % %Bismark Co. has 3,000 machine-hours available.
38Product-Mix Decisions Under Capacity Constraints One unit of Prod. #2 requires 7 machine-hours.One unit of Prod. #3 requires 2 machine-hours.What is the contribution of each productper machine-hour?Product #2: $1.70 ÷ 7 = $0.24Product #3: $0.60 ÷ 2 = $0.30
39adding or discontinuing customers and segments. Learning Objective 7Discuss what managersmust consider whenadding or discontinuingcustomers and segments.
40Profitability, Activity-Based Costing, and Relevant Costs Mountain View Furniture supplies furnitureto two local retailers – Stevens and Cohen.The company has a monthly capacityof 3,000 machine-hours.Fixed costs are allocated on the basis of revenues.
42Profitability, Activity-Based Costing, and Relevant Costs TotalRevenues $300,000Variable costs ,000Fixed costs ,000Total operating costs $280,000Operating income $ 20,000Machine-hours required ,000
43Profitability, Activity-Based Costing, and Relevant Costs Should Mountain View Furniture drop the Cohenbusiness, assuming that dropping Cohen woulddecrease its total fixed costs by 10%?New fixed costs would be:$150,000 – $15,000 = $135,000
45Profitability, Activity-Based Costing, and Relevant Costs Cohen’s business is providing acontribution margin of $40,000.$40,000 decrease in contribution margin– $15,000 decrease in fixed costs= $25,000 decrease in operating income.
46Profitability, Activity-Based Costing, and Relevant Costs Assume that if Mountain View Furniture dropsCohen’s business it can lease the excess capacityto the Perez Corporation for $70,000.Fixed costs would not decrease.Should Mountain View Furniture lease to Perez?
47Explain why the book value of equipment is irrelevant in Learning Objective 8Explain why the book valueof equipment is irrelevant inequipment-replacement decisions.
48Equipment-Replacement Decisions Example Existing ReplacementMachine MachineOriginal cost $80,000 $105,000Useful life years yearsAccumulated depreciation $50,000Book value $30,000Disposal price $14,000Annual costs $46,000 $ 10,000
49Equipment-Replacement Decisions Example Ignoring the time value of money andincome taxes, should the companyreplace the existing machine?The cost savings over a 4-year period will be$36,000 × 4 = $144,000.Investment = $105,000 – $14,000 = $91,000$144,000 – $91,000 = $53,000advantage of the replacement machine.
50Explain how conflicts can arise between the decision model Learning Objective 9Explain how conflicts can arisebetween the decision modelused by a manager and theperformance evaluation modelused to evaluate the manager.
51Decisions and Performance Evaluation What is the journal entry to sell the existing machine?Cash ,000Accumulated Depreciation 50,000Loss on Disposal 16,000Machine ,000
52Decisions and Performance Evaluation In the real world would the managerreplace the machine?An important factor in replacement decisionsis the manager’s perceptions of whether thedecision model is consistent with how themanager’s performance is judged.
53Decisions and Performance Evaluation Top management faces a challenge – that is,making sure that the performance-evaluationmodel of subordinate managers is consistentwith the decision model.