PPT Slides for Relevant Cost and Special Order Decisions

and (2) differ for the alternatives under consideration. Since relevant revenues differ between the alternatives, they are sometimes called differential revenues.
Relevant Information for Special Order
Differential revenue ($250 ×200) Avoidable unit-level costs ($180 × 200) Avoidable batch-level costs: Assembly setup Materials handling Contribution to income
If Premier can increase income by selling its printers for $250, can the company reduce its normal selling price to $250?
Selling 2,200 Printers for $250 Per Unit
6-11
Budgeted Cost for Expected Production of 2,000 Printers
Exhibit 6.1
Here is budgeted cost information for Premier, a company that produces printers. The company has enough capacity to produce additional printers, but is planning to produce to meet current demand.
6-9
Learning Objective
Make appropriate special order decisions.
LO2
6-10
Relevant Information and Special Decisions
Occasionally, a company receives an offer to sell its product at a price significantly below its normal selling price. The company must make a special order decision to accept or reject the offer.
I think I am beginning to see what you mean.
6-5
Relevance is Context-Sensitive
A particular cost that is relevant in one context may be irrelevant in another.
Unit-level Costs Batch-level Costs Product-level Costs Facility-level Costs Avoided by eliminating one unit of product. Avoided when a batch of work is eliminated. Avoided if a product line is eliminated. Some costs may be avoided if a business segment is eliminated.
$ 550,000 $ 396,000 24,200 77,300 199,200 696,700 $(146,700)
6-15
Learning Objective
Make appropriate outsourcing decisions.
$ 50,000 (36,000) (1,700) (500) (15,000) $ (3,200)
If the order is accepቤተ መጻሕፍቲ ባይዱed, profitability will decrease by $3,200.
6-14
Special Order Decision
Relevance and the Decision Context
A department store sells men’s, women’s, and children’s clothing. The store manager’s salary could not be eliminated if the store eliminated the line of children’s clothing. Is the store manager’s salary relevant to the decision to stop selling children’s clothing?
Two primary characteristics distinguish relevant from useless information:
1. Relevant information differs among the alternatives under consideration. 2. Relevant information is future oriented.
Sixth Edition
Thomas P. Bor-Yi
Edmonds
Tsay
Phillip R.
Olds
Learning Objective
Identify the characteristics of relevant information.
LO1
6-2
Relevant Information
Relevant Information for Special Order
Differential revenue ($250 ×200) Avoidable unit-level costs ($180 × 200) Avoidable batch-level costs: Assembly setup Materials handling Opportunity cost Contribution to income
$ 50,000 (36,000) (1,700) (500) $ 11,800
If the order is accepted, profitability will increase by $11,800.
6-13
Special Order Decision
Opportunity Costs
Premier has excess productive capacity. Suppose Premier has the opportunity to lease its excess capacity (unused building and equipment) for $15,000. Should Premier accept the special offer given this new information?
$ 360,000
22,000
77,300
÷ 2,000 = $329.25
199,200 $ 658,500
6-12
Special Order Decision
A foreign customer offers to purchase 200 printers at $250 per printer. This price is well below the unit cost of $329.25. Should the company accept this one time order?
6-6
No, the store manager’s salary will be the same if children’s clothing is no longer sold.
Differential Revenue and Avoidable Cost
Relevant revenues must (1) be future oriented
Revenue ($250 × 2,200) Unit-level costs ($180 × 2,200) Batch-level costs (11 × $2,200) Production-level costs Facility-level costs Total cost Projected loss
6-3
Sunk Cost
A sunk cost has been incurred in a past transaction and cannot be changed. Therefore, it is not relevant for making current decisions.
You’ve already taken the loss. The $25,000 is a sunk cost. You Just sell the stock need a car so sell the and buy the car! stock. I wish I hadn’t bought that stock. Cost me $25,000, and now it’s worth only It bothers me to take $15,000. I really need a car loss! butthe don’t have the cash!
6-4
Opportunity Costs
An opportunity cost is the sacrifice that is incurred in order to obtain an alternative opportunity.