1 / 34

ACC3200

ACC3200. Incremental Analysis for Short-Term Decision Making. Learning Objectives. Describe the five steps in the decision-making process Define and identify relevant costs and benefits Analyze a special-order decision. Analyze a make-or-buy decision

talia
Download Presentation

ACC3200

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. ACC3200 Incremental Analysis for Short-Term Decision Making

  2. Learning Objectives • Describe the five steps in the decision-making process • Define and identify relevant costs and benefits • Analyze a special-order decision. • Analyze a make-or-buy decision • Analyze the decision to eliminate an unprofitable business segment • Analyze a sell-or-process further decision. • Prioritize products to maximize short-term profit with constrained resources

  3. 7-3 Steps in the Decision-MakingProcess Improvefuture decisions

  4. 7-4 Relevant versus Irrelevant Costsand Benefits Relevantcosts are costs thatwill change depending on the alternative selected. Relevantcosts are also called differential costs, incremental costs, or avoidable costs.

  5. 7-5 Relevant versus Irrelevant Costsand Benefits Irrelevant costsare costs thatdo not differ between alternatives. Costs that have been incurred in the past. (sunk costs) Costs that are the same regardless of the alternative chosen.

  6. 7-6 Opportunity Costs and Capacity Considerations An opportunity cost is a benefit that is given up when one alternative is selected over another. At capacity, adding additional work requires giving up a portion of the existing work. The benefit of the existing work given up is an opportunity cost. With idle capacity, additional work may be added without sacrificing existing work. There is no opportunity cost to the additional work.

  7. 7-7 Special-Order Decisions A special order is a one-time order that is not considered part of the company’s normal ongoing business. When analyzing a special order, only the incremental costs and benefits are relevant.

  8. 7-8 Special-Order Decisions A major university has asked Mattel to make a special University Barbie, dressed in a sporty outfit with the school’s logo and colors. The university bookstore has offered to buy 25,000 of these dolls at a price of $7.00 each. Mattel has the capacity to fill the order without affecting production of other Barbie products, which are normally sold to toy stores and discount chains for $9.00 each. More Information

  9. 7-9 Special-Order Decisions Mattel estimates that its unit cost to produce the University Barbie will be: Should Mattel accept the special order?

  10. 7-10 Incremental Analysis (with Excess Capacity)

  11. 7-11 Qualitative Analysis Mattel should assure themselves thespecial-order price of $7.00 would not lead other customers, purchasing through regular channels, to expect a price reduction from $9.00 to $7.00. Mattel would not want to use this type of analysis to make long-run pricing decisions, because in the long run, prices must cover all costs, including fixed costs, if the company is to be profitable.

  12. 7-12 Incremental Analysis (without Excess Capacity) Variablecost = $5.00 The opportunity costis the contributionmargin lost onregular sales.

  13. 7-13 Incremental Analysis (without Excess Capacity)

  14. A decision to make a part or provide a service internally rather than to buy externally from a supplier is called a “make-or-buy” decision. 7-14 Make-or-Buy Decisions Make-or-buy decisions are also called insourcing versus outsourcing decisions.

  15. 7-15 Make-or-Buy Decisions Mattel is trying to decide whether to continue packaging the American Girl doll “in-house” or outsource the packaging process to an external supplier. Mattel’s packaging costs for the dolls are: The outside supplier bid $3.00 per doll for the packaging work.Should Mattel outsource the packaging?

  16. 7-16 Make-or-Buy Decisions • The agreement with the outside supplier includes a 3-year contract for a minimum of 200,000 units per year. • All costs directly related to the packaging activities, including all direct and indirect materials, labor, and supervision, would be avoided if the packaging is outsourced. • Other total fixed manufacturing overhead costs would remain unchanged. • The factory space that is now used for packaging could be used to expand production of a popular product line. The expansion would generate an additional $150,000 in profit per year.

  17. 7-17 Incremental Analysis

  18. 7-18 Qualitative Analysis • What is the supplier’s level of quality and reliability? • What happens if demand for the product drops below 200,000 units or rises significantly higher than 200,000? Does the supplier have the capacity to meet the increased demand? Will the price be higher or lower for any additional or fewer units? • • What happens in three years? Will the price of packaging increase significantly? Returning to internal packaging will be difficult after the space is converted to another use. • • What if the predicted profit to be generated by expanding the other product line has been substantially over- or underestimated? • • Does outsourcing the packaging create any additional risks, such as loss of sensitive information to the supplier that could result in a competitive disadvantage for Mattel?

  19. One of the most important decisions managers make is whether to continue or eliminate a business segment, such as a product or a store. A segment is a candidate for elimination if its revenues are less than its relevant (avoidable)expenses. 7-19 Decisions to Eliminate Unprofitable Segments

  20. 7-20 Decisions to Eliminate Unprofitable Segments Mattel has three versions of its Power-Wheels battery-powered vehicles. The company is consideringeliminating the Barbie Mustang product, becauseit has shown a loss for the past few years. • Considerations before eliminating the Barbie Mustang: • What costs (and revenues) will be affected by the decision? • Will the costs (and revenues) of other product lines be affected by the decision? • Are there any opportunity costs to consider, such as alternative use of facilities?

  21. 7-21 Decisions to Eliminate Unprofitable Segments Should Mattel drop the Barbie Mustang?

  22. 7-22 Decisions to Eliminate Unprofitable Segments • Elimination of the Barbie Mustang will eliminate the revenues, variable costs, and direct fixed costs for the Barbie Mustang product. • Elimination of the Barbie Mustang will increase sales of the Dora the Explorer Jeep by 10%, with no effect on the Jeep 4X4. • Total variable costs of the Dora the Explorer Jeep will also increase by 10 % as a result of the increased sales. • Total common fixed costs will not be affected by the elimination of the Barbie Mustang. They will be reallocated to the remaining products based on total sales dollars.

  23. 7-23 Incremental Analysis

  24. 7-24 Incremental Analysis Let’s look at an approach that focuses ononly the relevant items for the decision.

  25. 7-25 Qualitative Analysis What if the expected increase in sales of the Dora the Explorer Jeep has been overestimated or underestimated? • Will the elimination of the Barbie Mustang free up resources (people, space, or machines) that could be used in another way?• Can the company introduce another product that will yield more than $11,000 in incremental profit?• Are there any other opportunity costs associated with keeping the Barbie Musting?

  26. 7-26 Sell-or-Process Further Decisions Businesses are often faced with the decision to sell partially completed products or to process them to completion and hopefully sell them at a higher price. As a general rule, we process further only if incremental revenues exceed incremental costs. Costs of manufacturing the product up to the sell-or- process decision point are sunk and therefore irrelevant.

  27. 7-27 Sell-or-Process Further Decisions Mattel has developed a new toy, spending a total of $250,000 on R&D. Demand for the new toy is estimated to be 100,000 units at a price of $15 per unit. If the company spends an additional $100,000 on R&D to enhance the toy, it could be sold for $18 per unit. However, the enhanced toy would have a slightly higher manufacturing cost. The following table gives us the information we need to decide between the current design and the enhanced design.

  28. 7-28 Sell-or-Process Further Decisions Should Mattel sell the product as it is currently designed,or spend more money to create an enhanced design?

  29. 7-29 Sell-or-Process Further Decisions Mattel will make an additional $25,000in profit by enhancing the product.

  30. 7-30 Prioritizing Products with Limited Resources When a limited resource restricts a company’s ability to satisfy demand, the company is said to have a constrained resource that is referred to as a bottleneck. To maximize profits in the short run, a company with a bottleneck must prioritize its products or services so as to maximize contribution margin per unit of the constrained resource. The focus is on contribution margin instead of segment margin because fixed costs will not change in the short run, and are not relevant.

  31. 7-31 Prioritizing Products with Limited Resources One of Mattel’s factories produces three types of toy cars, Match Box, Hot Wheels, and Remote Control with the following financial and production information.

  32. 7-32 Prioritizing Products with Limited Resources

  33. 7-33 Prioritizing Products with Limited Resources

  34. End of Topic 7

More Related