differential analysis: key to decision making. incremental analysis a technique used in decision...
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Chapter 12Differential Analysis: Key to Decision Making
Incremental AnalysisA technique used in decision analysis that
compares alternatives by focusing on the differences in their projected revenues and costs.
Alternative A
Alternative B
Difference
Investment $1,000,000 $1,000,000 -0-
Revenues $275,000 year
$300,000 year
$25,000
Operating Costs
$100,000 year
$100,000 year
-0-
12-1 Relevant Decisions
Short Run Decisions
Keep or Drop (Segment Profitability)Make or BuySpecial OrderProduct (Sales) MixSell or Process Further
Keep or Drop TOTAL FIXED COSTS
HOME OFFICE DIVISION CORPORATE OFFICE HEADQUARTERS Allocatable Unallocatable Traceable Non Traceable Direct Common Avoidable Unavoidable
Table FormatSales-VC=Contribution Margin- Traceable=Product Line Segment TOTAL COSTs -Common Fixed =Net Income
Exercise 12-2
Make or Buy1. Do we have the capacity? Factory, Machines, Labor 2. Do we have the capability? Copyrights, Molds, Knowledge, Skill 3. Can we make it at acceptable Quality? Good Vendors available Monitoring the quality
Exercise 12-3
Special Order“Remember it is SPECIAL.—one time only” 1. over and above normal production2. Capacity exists3. Target Sales have already been reached 4. No fixed costs (both Selling and G&A and
overhead) are to be included----covered already5. Will not take away from regular customers6. Add any additional costs due to the order.
Exercise 12-4
Sales MixConstrained Resources or Constraint Labor Materials Machine HoursAnalysis Formulas Compute # of hour s, resources per unit Total $/ Cost per unit CM per unit
Sales -Variable Cost= Contribution Margin/ resource per unit= Contribution Margin per resource
Exercise 12-5
SELL OR PROCESS FURTHERIncremental Revenue – end of Joint costs to end of process further Split off ___Joint Costs___ Incremental Revenue
Exercise 12-6
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