Using Accounting for Decision-Making 27  Incremental analysis  Special sales orders  Make or buy decisions  Eliminate unprofitable segment

Equipment Replacement Decision Old EquipNew Equip Estimated life4 yrs4 yrs Original cost$60,000$20,000 Accum. deprec36,000N/A Disposal value now2,500N/A Disposal value in 4 yrs00 Operating exp / year7,0002,000 Should the old equipment be replaced?

Consider future cash-in and cash-out… … for all years affected. difference

Dropping a Product Line First ClassBusinessCoach. (10 seats)(16 seats)(150 seats) Sales$10,000$ 5,600$36,000 Variable Contrib Margin$ 9,700$ 5,280$35,700 Avoidable fixed Unavoidable fixed 2,500 4,000 37,500 Operating Income$ 6,450$ 780$(2,300) Should the airline discontinue coach service?

difference  Watch for unavoidable costs that do not change even when you drop a product line.  Beware: some of these costs might be allocated!

Gizmo Incorporated Should Gizmo accept a special sales order of 1,000 units at $28 per unit? Sales (8400 units)$294,000$35 Cost of Goods Sold 268, Gross Margin$ 25,200$ 3 Selling and Admin 16,800 2 Operating Income$ 8,400$ 1 Special Sales Orders

 Unit costs can be misleading.  Distinguish between fixed and variable costs.  How will total costs change? $294,000Sales ($35/unit or $28/unit) difference

Gizmo Incorporated Should BMI continue to make microprocessors or buy them externally for $12.00? DM$ 6,400$0.10 DL 320, MOH Super salary$ 40,000 Utilities11,000 Rent25,000 Depreciation 564,000 Total MOH 640, Total cost$966,400$15.10 Make-or-Buy Decisions

difference

Outsourcing  Buying a service that was previously performed within the firm.  Buying a component part that was previously made by the firm.

Potential benefit that may be obtained by following an alternative course of action. Opportunity Cost You cut your own hair. A company just had a very profitable year and is considering paying-off all its loans. The Winona Products example. What is the opportunity cost?

General Guidelines  Analyze total revenues and costs. Beware of unit costs  Many fixed costs are unavoidable.  Historical costs are sunk. Recognize costs that will not change  Many shared costs are unavoidable. Beware of allocated costs  Analyze CM per limited resource. Be aware of limited resources