14e_gnbhr_ch12_sm

Chapter 12 Diferential Analysis: The Key to Decision Making Solutions to Questions

© The McGraw-Hill Companies, Inc., 2012. All rights reserve. !ol"tions Man"al, Chapter 12

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%$ 12-1 A relevant cost is a cost that i&ers in total 'etween the alternatives alternatives in a ecision. 12-2 An incremental cost (or 'ene)t* is the change in cost (or 'ene)t* that will res"lt +rom some propose action. An opport"nit cost is the 'ene)t that is lost or sacri)ce when reecting some co"rse o+ action. A s"n cost is a cost that has alrea 'een inc"rre an that cannot 'e change ' an +"t"re ecision. 12-3 /o. aria'le costs are relevant costs onl i+ the i&er in total 'etween the alternatives "ner consieration. 12- /o. /ot all )e costs are s"n onl those +or which the cost has alrea alrea 'een irrevoca'l inc"rre. A varia'le cost can 'e a s"n cost i+ it has alrea 'een inc"rre. 12-! /o. A varia'le cost is a cost that varies in total amo"nt in irect proportion proportion to changes in the level o+ activit. A i&erential cost is the i&erence in cost 'etween two alternatives. alternatives. I+ the level o+ activit is the same +or the two alternatives, a varia'le cost will not 'e a&ecte an it will 'e irrelevant. 12-" /o. 3nl those +"t"re costs that i&er 'etween the alternatives are relevant. 12-# 3nl those costs that wo"l 'e avoie as a res"lt o+ ropping the pro"ct line are relevant in the ecision. Costs that will not 'e a&ecte ' the ecision are irrelevant. 12-$ /ot necessaril. An apparent loss ma 'e the res"lt o+ allocate common costs or o+ s"n costs that cannot 'e avoie i+ the pro"ct is roppe. A pro"ct sho"l 'e iscontin"e onl i+ the contri'"tion margin that will 'e lost as a res"lt o+ ropping the pro"ct is less than the )e costs that wo"l 'e avoie. 4ven in that sit"ation the pro"ct ma 'e retaine retaine i+ it promotes the sale o+ other pro"cts.

12-% Allocations o+ common )e costs can mae a pro"ct (or other segment* appear to 'e "npro)ta'le, whereas in +act it ma 'e pro)ta'le. 12-1& I+ a compan ecies to mae a part internall rather than to '" it +rom an o"tsie s"pplier, then a portion o+ the compan5s +acilities have to 'e "se to mae the part. The compan5s opport"nit cost is meas"re ' the 'ene)ts that co"l 'e erive +rom the 'est alternative "se o+ the +acilities. 12-11 An reso"rce that is re6"ire to mae pro"cts an get them into the hans o+ c"stomers co"l 'e a constraint. !ome eamples are machine time, irect la'or time, 7oor space, raw materials, investment capital, s"pervisor time, an storage space. 8hile not covere in the tet, constraints can also 'e intangi'le an o+ten tae the +orm o+ a +ormal or in+ormal polic that prevents the organi9ation organi9ation +rom +"rthering its goals. 12-12 Ass"ming that )e costs are not a&ecte, pro)ts are maimi9e when the total contri'"tion margin is maimi9e. A compan can maimi9e its total contri'"tion margin ' +oc"sing on the pro"cts with the greatest amo"nt o+ contri'"tion margin per "nit o+ the constraine reso"rce. 12-13 :oint 12-13 :oint pro"cts pro"cts are two two or more more pro"cts that are pro"ce +rom a common inp"t. :oint costs are the costs that are inc"rre "p to the split-o& point.  The split-o& point is the point in in the man"+act"ring process where oint pro"cts can 'e recogni9e recogni9e as inivi"al pro"cts. 12-1 :oint 12-1 :oint costs sho"l sho"l not 'e allocate allocate among oint pro"cts +or ecision-maing p"rposes. I+ oint costs are allocate among the oint pro"cts, then managers ma thin the are avoia'le costs o+ the en pro"cts. However, the oint costs will contin"e to 'e inc"rre as long as the process is r"n regarless o+ what is one with one o+ the en pro"cts. Th"s, when maing ecisions a'o"t the en pro"cts,

© The McGraw-Hill Companies, Inc., 2012. All rights reserve. !ol"tions Man"al, Chapter 12

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12-1 A relevant cost is a cost that i&ers in total 'etween the alternatives alternatives in a ecision. 12-2 An incremental cost (or 'ene)t* is the change in cost (or 'ene)t* that will res"lt +rom some propose action. An opport"nit cost is the 'ene)t that is lost or sacri)ce when reecting some co"rse o+ action. A s"n cost is a cost that has alrea 'een inc"rre an that cannot 'e change ' an +"t"re ecision. 12-3 /o. aria'le costs are relevant costs onl i+ the i&er in total 'etween the alternatives "ner consieration. 12- /o. /ot all )e costs are s"n onl those +or which the cost has alrea alrea 'een irrevoca'l inc"rre. A varia'le cost can 'e a s"n cost i+ it has alrea 'een inc"rre. 12-! /o. A varia'le cost is a cost that varies in total amo"nt in irect proportion proportion to changes in the level o+ activit. A i&erential cost is the i&erence in cost 'etween two alternatives. alternatives. I+ the level o+ activit is the same +or the two alternatives, a varia'le cost will not 'e a&ecte an it will 'e irrelevant. 12-" /o. 3nl those +"t"re costs that i&er 'etween the alternatives are relevant. 12-# 3nl those costs that wo"l 'e avoie as a res"lt o+ ropping the pro"ct line are relevant in the ecision. Costs that will not 'e a&ecte ' the ecision are irrelevant. 12-$ /ot necessaril. An apparent loss ma 'e the res"lt o+ allocate common costs or o+ s"n costs that cannot 'e avoie i+ the pro"ct is roppe. A pro"ct sho"l 'e iscontin"e onl i+ the contri'"tion margin that will 'e lost as a res"lt o+ ropping the pro"ct is less than the )e costs that wo"l 'e avoie. 4ven in that sit"ation the pro"ct ma 'e retaine retaine i+ it promotes the sale o+ other pro"cts.

12-% Allocations o+ common )e costs can mae a pro"ct (or other segment* appear to 'e "npro)ta'le, whereas in +act it ma 'e pro)ta'le. 12-1& I+ a compan ecies to mae a part internall rather than to '" it +rom an o"tsie s"pplier, then a portion o+ the compan5s +acilities have to 'e "se to mae the part. The compan5s opport"nit cost is meas"re ' the 'ene)ts that co"l 'e erive +rom the 'est alternative "se o+ the +acilities. 12-11 An reso"rce that is re6"ire to mae pro"cts an get them into the hans o+ c"stomers co"l 'e a constraint. !ome eamples are machine time, irect la'or time, 7oor space, raw materials, investment capital, s"pervisor time, an storage space. 8hile not covere in the tet, constraints can also 'e intangi'le an o+ten tae the +orm o+ a +ormal or in+ormal polic that prevents the organi9ation organi9ation +rom +"rthering its goals. 12-12 Ass"ming that )e costs are not a&ecte, pro)ts are maimi9e when the total contri'"tion margin is maimi9e. A compan can maimi9e its total contri'"tion margin ' +oc"sing on the pro"cts with the greatest amo"nt o+ contri'"tion margin per "nit o+ the constraine reso"rce. 12-13 :oint 12-13 :oint pro"cts pro"cts are two two or more more pro"cts that are pro"ce +rom a common inp"t. :oint costs are the costs that are inc"rre "p to the split-o& point.  The split-o& point is the point in in the man"+act"ring process where oint pro"cts can 'e recogni9e recogni9e as inivi"al pro"cts. 12-1 :oint 12-1 :oint costs sho"l sho"l not 'e allocate allocate among oint pro"cts +or ecision-maing p"rposes. I+ oint costs are allocate among the oint pro"cts, then managers ma thin the are avoia'le costs o+ the en pro"cts. However, the oint costs will contin"e to 'e inc"rre as long as the process is r"n regarless o+ what is one with one o+ the en pro"cts. Th"s, when maing ecisions a'o"t the en pro"cts,

© The McGraw-Hill Companies, Inc., 2012. All rights reserve. !ol"tions Man"al, Chapter 12

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the oint costs are not avoia'le an are irrelevant. 12-1! I+ the incremental reven"e +rom +"rther processing ecees the incremental costs o+ +"rther processing, the pro"ct sho"l 'e processe +"rther. 12-1" Most costs o+ a 7ight are either s"n costs, or costs that o not epen on

the n"m'er o+ passengers on the 7ight. ie selling epense. . > General aministrative overhea.................. >

Case 2 Not  Relevan Relevan t  t  > > >

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© The McGraw-Hill Companies, Inc., 2012. All rights reserve. #;2

Managerial Acco"nting, 1;th 4ition

'(ercise 12-2 ($0 min"tes* 1. /o, the ho"seeeping program sho"l not 'e iscontin"e. It is act"all generating a positive program segment margin an is, o+ co"rse, proviing a val"a'le service to seniors. Comp"tations to s"pport this concl"sion +ollowB Contri'"tion margin lost i+ the ho"seeeping program is roppe.............. ie costs that can 'e avoieB

(@0,000*

1=,00 Dia'ilit ins"rance....................................... 0 Erogram aministrator5s salar................... $F,000 =2,000 r"ms...............

Total Direct  3aorHours

$,=00 1,#2=

1.2= 0.2=

;,$F= ;0# ;,F@1

2,=00

0.2=

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 22.=0 L [email protected] per ho"r Z 1.2= ho"rs  ;.=0 L [email protected] per ho"r Z 0.2= ho"r !ome ca"tion is avise. Elan 1 ass"mes that irect la'or is a )e cost. However, this plan re6"ires over ;,000 more irect la'or-ho"rs than Elan 2 an the present sit"ation. A +"ll-time emploee wors a'o"t 1,%00 ho"rs a ear, so the ae worloa is a'o"t e6"ivalent to two +"ll-time emploees. !> !>