Differential Cost Analysis chapter7

Chapter 7 Differential Cost Analysis (aka Incremental Analysis) for Operating Decisions

Describe & Define Differential Analysis ,[object Object],[object Object],[object Object]

Differential Analysis Model Change in Profit Profit = Profit - Operating Profit Change in Fixed Costs Fixed Costs = Fixed Costs - Less Fixed Costs Change in CM CM CM Total Contribution Margin (CM) Change in VC VC = VC - Less Variable Costs (VC) Change in Revenue Revenue Revenue Revenue Difference Status Quo = Alternative -

Differential Analysis Cont. ,[object Object],[object Object],[object Object],[object Object]

Review Short-Run vs. Long-Run Pricing Decisions ,[object Object],[object Object],[object Object]

What is the differential approach to pricing? ,[object Object],[object Object],[object Object]

Long-Run Pricing Decisions (Slide 1 of 3) ,[object Object],[object Object],[object Object]

Review the Value Chain R & D Design Produc- tion Market- ing Distrib- ution Customer Service Costs Value Chain Activities Premanufacturing (Upstream) Manufacturing Post-manufacturing Downstream

Long-Run Pricing Decisions (Slide 3 of 3) ,[object Object],[object Object],[object Object],[object Object]

Review Life-Cycle Product Costing and Pricing ,[object Object],[object Object],[object Object]

Explain Using Target Prices to Set Target Costs ,[object Object],[object Object],[object Object],[object Object]

Explain Legal Issues Relating Costs to Prices ,[object Object],[object Object],[object Object],[object Object]

Customer Profitability ,[object Object],[object Object],[object Object]

What are the four general categories of customer costs? ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Build a Chart of Activities to Compute Customer Costs ,[object Object],Retain ,[object Object],[object Object],[object Object],Maintain ,[object Object],[object Object],[object Object],Provide Goods & Services ,[object Object],[object Object],[object Object],Acquire Activities Customer Cost

Comment on Decisions when Scarce Resources are Limited ,[object Object],[object Object]

Decisions with Scarce Resources ,[object Object],[object Object],[object Object]

Define the Following ,[object Object],[object Object],[object Object],[object Object]

List the Five Steps to Managing Bottlenecks ,[object Object],[object Object],[object Object],[object Object],[object Object]

Explain Make or Buy Decisions ,[object Object],[object Object]

Define the Following ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

How do you decide whether to process further or not? ,[object Object],[object Object],[object Object]

Make or Buy ,[object Object],[object Object],[object Object],[object Object],[object Object]

Make or Buy Example (Continued) ,[object Object],[object Object],Decision: Continue to make switches. Net Income Make Buy Increase (Decrease) Direct materials $ 50,000 $ - 0 - $ 50,000 Direct labor 75,000 - 0 - 75,000 Variable manufacturing costs 40,000 - 0 - 40,000 Fixed manufacturing costs 60,000 50,000 10,000 Purchase price -0- 200,000 ( 200,000) Total annual cost $225,000 $250,000 $ (25,000)

Opportunity Costs Example – Baron Company Continued ,[object Object],[object Object],Net Income Make Buy Increase (Decrease) Total annual cost $225,000 $250,000 $(25,000) Opportunity cost 28,000 - 0 - 28,000 Total cost $253,000 $250,000 $ 3,000 Decision: Based on the analysis, Baron should buy the switches as the company will be $3,000 better off.

Sell or Process Further ,[object Object],[object Object],[object Object]

Sell or Process Further Single-Product Case ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Sell or Process Further Single-Product Case (Continued) ,[object Object],[object Object], Process Net Income Sell Further Increase (Decrease) Sales per unit $50.00 $60.00 $10.00 Cost per unit Direct materials 15.00 17.00 (2.00) Direct labor 10.00 14.00 (4.00) Variable manufacturing overhead 6.00 8.40 (2.40) Fixed manufacturing overhead 4.00 4.00 - 0 - Total $35.00 $43.40 $(8.40) Net income per unit $15.00 $16.60 $1.60

Sell or Process Further Multiple-Product Case ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Sell or Process Further Multiple-Product Case ,[object Object],[object Object],[object Object],[object Object]

Sell or Process Further Multiple-Product Case – Example (Continued) ,[object Object],[object Object],[object Object],[object Object],[object Object],Decision: Do not process the cream further. Incremental revenue ($8,000) is less than incremental costs ($10,000); income decreases $2,000. Process Net Income Sell Further Increase (Decrease) Sales per day $19,000 $27,000 $ 8,000 Cost per day Processing cream into cottage cheese - 0 - 10,000 (10,000) $19,000 $17,000 $ (2,000)

Sell or Process Further Multiple-Product Case – Example (Continued) ,[object Object],[object Object],[object Object],[object Object],[object Object],Decision: Process the skim milk further. Incremental revenue ($15,000) exceeds incremental costs ($8,000); income increases $7,000. Process Net Income Sell Further Increase (Decrease) Sales per day $11,000 $26,000 $ 15,000 Cost per day Processing skim milk into condensed milk - 0 - 8,000 ( 8,000) $11,000 $18,000 $ 7,000

Eliminate an Unprofitable Segment ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Eliminate an Unprofitable Segment ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Pro Master Champ Total Sales $800,000 $300,000 $100,000 $1,200,000 Variable expenses 520,000 210,000 90,000 820,000 Contribution margin 280,000 90,000 10,000 380,000 Fixed expenses 80,000 50,000 30,000 160,000 Net income $200,000 $ 40,000 $(20,000) $ 220,000

Eliminate an Unprofitable Segment Example (Continued) ,[object Object],[object Object],[object Object],[object Object],Pro Master Total Sales $800,000 $300,000 $1,100,000 Variable expenses 520,000 210,000 730,000 Contribution margin 280,000 90,000 370,000 Fixed expenses 100,000 60,000 160,000 Net income $180,000 $ 30,000 $ 210,000 ELIMINATE CHAMP?

Eliminate an Unprofitable Segment Example (Continued) ,[object Object],[object Object],Decision: Do not eliminate Champ. ELIMINATE CHAMP? Net Income Continue Eliminate Increase (Decrease) Sales $100,000 $ - 0 - $(100,000) Variable expenses 90,000 - 0 - 90,000 Contribution margin 10,000 - 0 - (10,000) Fixed expenses 30,000 30,000 - 0 - Net income $(20,000) $ (30,000) $ (10,000)

Allocate Limited Resources ,[object Object],[object Object],[object Object],[object Object]

Allocate Limited Resources ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Allocate Limited Resources Example (Continued) ,[object Object],[object Object],[object Object],Decision: Shift sales mix to standard sets or increase machine capacity

Differential Cost Analysis chapter7

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