11ch11

Decision Making and Relevant InformationDecision Making and
Learning Objective 1
Information and the
for making a choice, often involving
quantitative and qualitative analysis.
Five-Step Decision Process
The Meaning of Relevance
Historical costs
Sunk costs
Differential income
Differential costs
Distinguish between quantitative
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Quantitative and Qualitative
One-Time-Only
Current monthly production is 30,000 towels.
Costs can be classified as either variable or fixed
with respect to units of output.
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One-Time-Only
One-Time-Only
Total fixed overhead is $105,000.
Marketing costs per unit are $7
($5 of which is variable).
What is the full cost per towel?
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One-Time-Only
5,000 towels from Bismark Co. at
$11.50/towel for a total of $57,500.
No marketing costs will be incurred.
Variable ($8.50 + $5.00): $13.50
One-Time-Only
What are the relevant costs of making the towels ?
$57,500 – $42,500 = $15,000
Two Potential Problems in
Outsourcing versus Insourcing
Make-or-Buy Decisions Example
Management is considering producing a part it
needs (#2) or buying a part produced
by Towson Co. for $0.55.
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Direct materials $ 28,000
Direct labor 18,500
Mixed overhead 29,000
Variable overhead 15,000
Fixed overhead 30,000
handling and setup costs.
in 100 batches of 1,500 units each.
Total material handling and setup costs
equal fixed costs of $9,000 plus variable
costs of $200 per batch.
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$120,500 ÷ 150,000 units = $0.8033/unit
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150,000 units of Part #2 expected to be
sold will be manufactured in 150
batches of 1,000 units each.
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decrease to $100.
same as this year.
$61,500 ÷ 150,000 = $0.41 per unit
Direct material $28,000
Direct labor 18,500
Variable overhead 15,000
Cost to buy: (150,000 × $0.55) $82,500
Manufacturing $61,500
Total relevant cost to make $76,500
*150 × $100 = $15,000
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salaries to support material handling and
setup will not be incurred if Part #2 is
purchased from Towson Co..
Should Bismark Co. buy the part or make the part?
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Explain the opportunity-cost
used in decision making.
Opportunity Costs,
Towson, it can use the facilities previously
used to manufacture Part #2 to produce
Part #3 for Krysta Company.
The expected additional future operating
income is $18,000.
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Opportunity Costs,
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 produce
Part #3.
Opportunity Costs,
Buy Part #2 and do not make Part #3: $82,500
Buy Part #2 and make Part #3:
$82,500 – $18,000 = $64,500
Opportunity Costs,
that is forgone (rejected) by not using a
limited resource in its next-best alternative use.
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Opportunity Costs,
Cost per unit when each purchase is
1,500 units = $0.55.
to or greater than 150,000 = $0.54.
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Opportunity Costs,
(1,500 × .55) ÷ 2 = $412.50 or
(150,000 × $0.54) = $40,500
government bonds is 6%.
Opportunity Costs,
Purchase order costs: (100 × $40) $ 4,000.00
Purchase costs: (150,000 × $0.55) $82,500.00
Annual interest income: $ 24.75
Opportunity Costs,
Purchase order costs: (1 × $40) $ 40
Purchase costs: (150,000 × $0.54) $81,000
Annual interest income: $ 2,430
are capacity constraints.
Product-Mix Decisions
Sales price $2.11 $14.50
Variable expenses 0.41 13.90
Contribution margin $1.70 $ 0.60
Bismark Co. has 3,000 machine-hours available.
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Product-Mix Decisions
What is the contribution of each product
per machine-hour?
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Discuss what managers
must consider when
adding or discontinuing
customers and segments.
Profitability, Activity-Based
to two local retailers – Stevens and Cohen.
The company has a monthly capacity
of 3,000 machine-hours.
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Profitability, Activity-Based Costing, and Relevant Costs
Stevens Cohen
Operating income $ 30,000 $(10,000)
Machine-hours required 2,000 1,000
Total
Should Mountain View Furniture drop the Cohen
business, assuming that dropping Cohen would
decrease its total fixed costs by 10%?
New fixed costs would be:
$150,000 – $15,000 = $135,000
Stevens Alone
Revenues $200,000
Cohen’s business is providing a
contribution margin of $40,000.
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Assume that if Mountain View Furniture drops
Cohen’s business it can lease the excess capacity
to the Perez Corporation for $70,000.
Fixed costs would not decrease.
Should Mountain View Furniture lease to Perez?
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equipment-replacement decisions.
Equipment-Replacement Decisions Example
Accumulated depreciation $50,000
Book value $30,000
Disposal price $14,000
Equipment-Replacement Decisions Example
income taxes, should the company
replace the existing machine?
$36,000 × 4 = $144,000.
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between the decision model
performance evaluation model
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Decisions and
Performance Evaluation
What is the journal entry to sell the existing machine?
Cash 14,000
Decisions and
replace the machine?
is the manager’s perceptions of whether the
decision model is consistent with how the
manager’s performance is judged.
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Decisions and
making sure that the performance-evaluation
model of subordinate managers is consistent
with the decision model.
End of Chapter 11

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11ch11