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10
Tactical Decision Making经营决策

10-1

Learning Objectives
?

Describe the tactical decisionmaking model.
Explain how the activity resource usage model is used in assessing relevancy.

?

10-2

Learning Objectives (continued)
?

Apply the tactical decision-making concepts in a variety of management situations. Choose the optimal product mix when faced with one constrained resource.

?

10-3

Learning Objectives (continued)
?

Explain the impact of cost on pricing decisions.

?

Use linear programming to find the optimal solution to a problem of multiple constrained resources. (Appendix)

10-4

EXAMPLE
? ?

Will you drive or fly to Florida for spring break? You have gathered the following information to help you with the decision.
? Motel cost is $80 per night. ? Meal cost is $20 per day. ? Your car insurance is $100 per month. ? Kennel cost for your dog is $5 per day. ? Round-trip cost of gasoline for your car is $200. ? Round-trip airfare and rental car for a week is $500.

?

Driving requires two days, with an overnight stay, cutting your time in Florida by two days.

10-5

Which do you prefer?

VS

10-6

EXAMPLE
Florida Spring Break Drive/Fly Analysis Cost Motel Eating out costs Kennel cost Car insurance Gasoline Airfare/rental car Drive $ 640 160 40 100 200 Fly $ 640 160 40 100 500

8 days @ $80

8 days @ $20
8 days @ $5

10-7

EXAMPLE
Florida Spring Break Drive/Fly Analysis Cost Motel Eating out costs Kennel cost Car insurance Gasoline Airfare/rental car Drive $ 640 160 40 100 200 Fly $ 640 160 40 100 500

Costs do not differ, so they are not relevant to decision. Also, car insurance is not relevant to the decision as it is a past cost.
10-8

EXAMPLE
Florida Spring Break Drive/Fly Analysis Cost Motel Eating out costs Kennel cost Car insurance Gasoline Airfare/rental car Drive $ 640 160 40 100 200 Fly $ 640 160 40 100 500

Are the extra two days in Florida worth the $300 extra cost to fly?

Transportation costs differ between the two alternatives, so they are relevant to your decision
10-9

Decision-Making Process
? ?

?

? ?

?

Recognize and define the problem. Identify alternatives as possible solutions to the problem; eliminate alternatives that are clearly not feasible. Identify the costs and benefits associated with each feasible alternative. Classify costs and benefits as relevant or irrelevant and eliminate irrelevant ones from consideration. Total the relevant costs and benefits for each alternative. Assess the qualitative factors. Select the alternative with the greatest overall benefit.
10-10

Relevant Costs 相关成本Defined
? ?

Costs that differ across alternatives Costs that deal with future courses of action

10-11

Relevant Cost and Benefits
A relevant cost possesses two important characteristics: 1. It must be a future cost. 2. It must differ between decision alternatives.

10-12

Relevant Cost and Benefits
A relevant benefit is a benefit (revenue or cash inflow) that is pertinent to a particular business decision. A relevant benefit is a future benefit that differs between alternatives.

10-13

Sunk Costs沉没成本
Expenditures that have already occurred and cannot be changed by current or future actions are called sunk costs.

10-14

Irrelevant Information
Irrelevant information possesses either of the following qualities: 1. It is a sunk cost or revenue. 2. It does not differ between alternatives.

10-15

Quantitative or Qualitative?
Quantitative factors can be expressed as a number. Qualitative factors cannot be expressed numerically and must be described in words.

Most management decisions require the consideration of both quantitative and qualitative factors.
10-16

Determining Relevant Cost and Benefit
Is the item a future cost or benefit?
Yes No

The cost or benefit is not a relevant item.

Does the cost or benefit differ from decision alternatives?
Yes

No

The cost or benefit is not a relevant item.

The cost or benefit is a relevant item.
10-17

Some Types of Decisions Illustrated
?
? ? ? ? ?

Equipment Replacement设备更换决策 Make or Buy自制或外购决策 Keep or Drop关停决策 Special Order特别订货决策 Sell or Process Further是否深加工决策 Product Mix生产组合决策
Important: Short-term Perspective

10-18

Equipment Replacement – Gather Relevant Information

Bill Smith & Partners purchased computer equipment two weeks ago for $35,500. Estimated useful life is 5 years with a residual value of $500. Depreciation method is straight-line at $7,000 per year.
10-19

Equipment Replacement – Gather Relevant Information

Cost of operating equipment is two operators at $18,000 per year each. There is a cancelable maintenance contract which costs $1,000/year.

Equipment can be sold now for $10,000.
10-20

Equipment Replacement – Gather Relevant Information

A new model can be purchased for $76,000. Estimated useful life is 5 years with a residual value of $1,000. Depreciation method is straight-line at $15,000 per year.
10-21

Equipment Replacement – Gather Relevant Information

Cost of operating equipment is one operator at $18,000 per year. There is a cancelable maintenance contract which costs $1,000/year. A summary of the cost and benefit of each system can now be made.
10-22

Replacement Cost Summary
Old System New System $76,000 $15,000 75,000 18,000 90,000 1,000 5,000 $ 1,000
10-23

Start-up: Cost of system Operating: Annual depreciation Total depreciation Annual labor cost Total labor cost Annual maintenance cost Total maintenance cost Shutdown: Residual value Current sale price

$ 35,500 $ 7,000 35,000 36,000 180,000 1,000 5,000 500 10,000

$

Determine the Relevant Cost and Benefit of Each Alternative

Relevant Total labor cost Residual value Current sale price

$180,000 $ 500 $ 10,000

Irrelevant Cost of system $ 35,500 Depreciation $ 35,000 Maintenance cost $ 5,000
10-24

Determine the Relevant Cost and Benefit of Each Alternative

The $35,500 cost of the old system is not a relevant consideration in deciding whether to replace the system.

Because it is a past, not a future, cost.

10-25

Determine the Relevant Cost and Benefit of Each Alternative

Depreciation is an allocation of the cost of the system which is spread over (or charged to) the future periods in which the equipment is expected to be used.

10-26

Determine the Relevant Cost and Benefit of Each Alternative

Relevant Cost of system Total labor cost Residual value

$76,000 $90,000 $ 1,000

Irrelevant Depreciation Maintenance cost

$75,000 $ 5,000
10-27

Replacement Cost Comparison
Keep Old System Replace Old System $ (76,000)

Start-up: Cost of new system Operating: Labor cost: Old system New system Shutdown: Residual value of old system Sale price of old system Residual value of new system Total relevant costs

$(180,000)

(90,000)
500 10,000 1,000 $(155,000)

$(179,500)

$24,500 in favor of buying the new system

10-28

Special Orders
Manufacturing business must often consider whether to accept a special order. Such an order usually includes a discounted price for the items being ordered.

10-29

Gather Relevant Information
Sears offers Alumafloat Company $125 each for 1,000 boats. Alumafloat’s normal selling price is $160 per boat. The production cost per boat is $130. Expected sales (excluding the special order) are 5,500 boats.
10-30

Gather Relevant Information
Alumafloat Expected sales Normal selling price
Direct material costs Direct labor costs Variable production costs Fixed production costs Total cost of goods sold

Per Unit Total 1 5,500 $160 $880,000
$ 50 55 10 15 $130 $275,000 302,500 55,000 82,500 $715,000

Expected gross margin: $880,000 – $715,000 = $165,000
10-31

Gather Relevant Information
At first glance, the order appears to be an unacceptable offer. The special price is below the normal cost per unit of $130.

10-32

Gather Relevant Information
Alumafloat Special order units Special selling price Direct material costs Direct labor costs Variable production costs Total relevant costs Total increase in profit Per Unit Total 1 1,000 $ 125 $125,000 $ (50) (55) (10) ($115) $ 10 $ (50,000) (55,000) (10,000) ($115,000) $ 10,000

10-33

Special Order Final Analysis
Although the special order price is below the normal full cost per unit, Alumafloat can experience a $10,000 increase in operating profit this period by accepting the special order.

10-34

Make or Buy Decisions
Often companies purchase subcomponents instead of manufacturing them.

Buying services, products, or components from outside vendors instead of producing them is called outsourcing.

10-35

Make or Buy Decisions
The basic make or buy question is whether a company should make its own parts to be used in its products or buy them from vendors.

10-36

Gather Relevant Information
The product manager of Microbake is approached by an outside vendor offering to supply a timer for $12. Currently Microbake makes the timer.

The company uses 80,000 timers each year.
The cost sheets indicate that each timer costs $14 to produce.
10-37

Gather Relevant Information

Cost per Unit

Total Cost for 80,000 Units

Direct material Direct labor Variable overhead Fixed overhead Total costs

$ 5 4 1 4 $14

$ 400,000 320,000 80,000 320,000 $1,120,000
10-38

Gather Relevant Information
Although the $14 unit cost shown seemingly indicates that the company should buy, the answer is rarely so obvious.

The essential question is the difference in expected future costs between the alternatives.

10-39

Selecting Relevant Costs
Future? Direct material yes Differs? yes Relevant? yes

Direct labor Variable manufacturing overhead Fixed manufacturing overhead

yes
yes

yes
yes

yes
yes

yes

no

no
10-40

Relevant Cost Comparison
Make

Cost to purchase Direct material Direct labor Variable overhead Total relevant costs

Buy $960,000

$400,000 320,000 80,000 $800,000

$960,000

$160,000 in favor of making the oven timers in-house
10-41

Relevant Cost Comparison With Fixed Costs Shown
Make

Cost to purchase Direct material Direct labor Variable overhead Fixed overhead Total relevant costs

Buy $ 960,000

$ 400,000 320,000 80,000 320,000 320,000 $1,120,000 $1,280,000 $160,000 in favor of making the oven timers in-house
10-42

Special Relevant Cost Considerations for Fixed Costs

Assume that Microbake could reduce fixed costs by $195,000.

10-43

Relevant Cost Comparison
Make

Cost to purchase Direct material Direct labor Variable overhead Fixed overhead Total relevant costs

Buy $960,000

$400,000 320,000 80,000 195,000 $995,000

$960,000

$35,000 in favor of buying the oven timers from the outside vendor
10-44

Relevant Cost Comparison With Fixed Costs Shown
Make

Cost to purchase Direct material Direct labor Variable overhead Fixed overhead Total relevant costs

Buy $ 960,000

$ 400,000 320,000 80,000 320,000 $1,120,000

125,000 $1,085,000

$35,000 in favor of buying the oven timers from the outside vendor
10-45

Opportunity Costs
An opportunity cost is something of value that is given up when one alternative is chosen over another.

10-46

Opportunity Cost Example
Assume that if Microbake purchases the timers from the outside vendor, they could use the released production capacity to make electronic alarm clocks.

The alarm clocks will provide an annual contribution margin of $200,000.
Fixed costs remain at $320,000.
10-47

Relevant Cost with Opportunity Cost
Make

Cost to purchase Direct material Direct labor Variable overhead Fixed overhead Total relevant costs

Buy $960,000

$ 400,000 320,000 80,000 200,000 $1,000,000

$960,000

$40,000 in favor of buying the oven timers from the outside vendor
10-48

Opportunity Cost Analysis
The $200,000 opportunity cost is added to the relevant cost of the make decision.

If they make the timers, they are unable to make the clocks and unable to realize the increased profits from the clock sales.

10-49

Opportunity Cost Analysis
Without the opportunity cost, the choice is to make the timers.

With the opportunity cost, the choice is to buy the timers.

10-50

Activity Resource Usage Model and Assessing Relevancy
Flexible Resources弹性资源 Resources Acquired as Needed

a. Demand Changes b. Demand Constant

Relevant Not Relevant

10-51

Activity Resource Usage Model and Assessing Relevancy (continued)
Committed Resources约束性资源 Acquired in Advance (Short Term)

a. Demand Increase < Unused Capacity b. Demand Increase > Unused Capacity c. Demand Decrease (Permanent) 1. Activity Capacity Reduced 2. Activity Capacity Unchanged

Not Relevant Relevant Relevant Not Relevant

10-52

Activity Resource Usage Model and Assessing Relevancy (continued)
Committed Resources Resources Acquired in Advance (Multiperiod Capacity)

a. Demand Increase < Unused Capacity b. Demand Decrease (Permanent) c. Demand Increase > Unused Capacity

Not Relevant Not Relevant Capital Decision

10-53

One Constrained Resource约束资源
Jorgenson Company produces two types of gears: X and Y. Gear X has a contribution margin of $25 per unit and Gear Y has a unit contribution margin of $10. Each Gear must be notched by a special machine. The Company owns eight of these machines which can produce a total of 40,000 hours of machine time per year. The company can sell all that it produces of either model. The machine time required for Gear X is two hours per unit and for Gear Y is one half an hour per unit.

How many of each model should be produced?
10-54

One Constrained Resource (continued)
Answer: To maximize total contribution margin, select the product that yields the highest contribution margin per unit of scarce resource: Gear X: $25/2 = $12.50 per hour Economy: $10/.5 = $20.00 per hour Contribution for Gear X: 40,000 hours @ $12.50 = $500,000 Contribution for Gear Y: 40,000 hours @ $20.00 = $800,000

The Gear Y yields the highest CM per unit of scarce resource. Thus, 40,000/.5 = 80,000 units of Gear Y should be produced and none of Gear X.

10-55

Two Approaches to Pricing
1. Cost-Based Pricing成本加成定价法 2. Target Costing and Pricing目标成本 定价法

10-56

A Product Pricing Example
Revenues Cost of goods sold: Direct materials Direct labour Overhead Gross profit Selling and administrative expenses Operating income $856,500 $489,750 140,000 84,000

713,750 $142,750 25,000 $117,750 =======

10-57

Determining Markup Percentages
Markup on COGS= (S & A expenses + Operating income) / COGS = ($25,000 + $117,750) / $713,750 = 0.20 Markup on direct materials = (DL + OH + S & A expenses + Oper. income) / Direct mater. = ($140,000 + $84,000 + $25,000 + $117,750) / $489,750

= 0.749

10-58

Target Costing and Pricing
Target costing is a method of determining the cost of a product or service based on the price (target price) that customers are willing to pay.
This is also referred to as price-driven costing.

10-59

Legal Aspects of Pricing
There are certain issues that we must be aware of whenever we make pricing decisions: ? Predatory pricing
? Price Discrimination ? Price Gouging

10-60

Multiple Constrained Resource
To the Jorgenson Company example for a one constrained resource, add the following additional constraint: the market limits sales of GEAR Y to 60,000 units. Formulate the linear programming problem and solve using the graphical method
Let X1 = GEAR X, and X2 = GEAR Y Formulation: Subject to: Max CM = 25X1 + 10X2 2X1 + .5X2 < 40,000 X2 < 60,000

10-61

X2

Multiple Constrained Resource (continued)
D 2X 1 +.5X2 < 20,000 C

80,000

60,000

X2 < 60,000

B A 20,000

X1

10-62

Multiple Constrained Resource (continued)
Corner Point A B C* D X1 0 20,000 5,000 0 X2 0 0 60,000 60,000 CM = 25X1 + 10X2 0 $500,000 $725,000 $600,000

* Point C is optimal
The X1 value of point C is found by substituting the second equation into the first one like so:

2X1 + .5 (60,000) = 40,000
2X1 +30,000 = 40,000 2X1 = 10,000 X1 = 5,000
10-63

Now, Let’s do some exercises!

10-64

EXAMPLE ONE
JamCo currently sells 100,000 units of its product. The company has revenue and costs as shown below:

Sales Direct materials Direct labor Factory overhead Selling expenses Administrative expenses Total expenses Operating income

Per Unit $ 10.00 3.50 2.20 1.10 1.40 0.80 $ 9.00 $ 1.00

$

$ $

Total 1,000,000 350,000 220,000 110,000 140,000 80,000 900,000 100,000
10-65

EXAMPLE ONE
JamCo is approached by an overseas company that offers to purchase 10,000 units at $8.50 per unit. If JamCo accepts the offer, total factory overhead will increase by $5,000; total selling expenses will increase by $2,000; and total administrative expenses will increase by $1,000. Should JamCo accept the offer?

10-66

EXAMPLE ONE
If you are the boss of JamCo , what’s your decision?
Our cost is $9.00 per unit. I can’t sell for $8.50 per unit.

10-67

EXAMPLE ONE
Current Business $ 1,000,000 $ 350,000 220,000 110,000 140,000 80,000 $ 900,000 $ 100,000 Additional Business $ 85,000 $ 35,000 22,000 5,000 2,000 1,000 $ 65,000 $ 20,000 Combined $ 1,085,000 $ 385,000 242,000 115,000 142,000 81,000 $ 965,000 $ 120,000

Sales Direct materials Direct labor Factory overhead Selling expenses Admin. expenses Total expenses Operating income

This analysis leads to the correct decision.
10-68

EXAMPLE ONE
Current Business $ 1,000,000 $ 350,000 220,000 110,000 140,000 80,000 $ 900,000 $ 100,000 Additional Business $ 85,000 $ 35,000 22,000 5,000 2,000 1,000 $ 65,000 $ 20,000 Combined $ 1,085,000 $ 385,000 242,000 115,000 142,000 81,000 $ 965,000 $ 120,000

Sales Direct materials Direct labor Factory overhead Selling expenses Admin. expenses Total expenses Operating income

10,000 new units × $8.50 selling price = $85,000
10-69

EXAMPLE ONE
Current Business $ 1,000,000 $ 350,000 220,000 110,000 140,000 80,000 $ 900,000 $ 100,000 Additional Business $ 85,000 $ 35,000 22,000 5,000 2,000 1,000 $ 65,000 $ 20,000 Combined $ 1,085,000 $ 385,000 242,000 115,000 142,000 81,000 $ 965,000 $ 120,000

Sales Direct materials Direct labor Factory overhead Selling expenses Admin. expenses Total expenses Operating income

10,000 new units × $3.50 = $35,000
10-70

EXAMPLE ONE
Current Business $ 1,000,000 $ 350,000 220,000 110,000 140,000 80,000 $ 900,000 $ 100,000 Additional Business $ 85,000 $ 35,000 22,000 5,000 2,000 1,000 $ 65,000 $ 20,000 Combined $ 1,085,000 $ 385,000 242,000 115,000 142,000 81,000 $ 965,000 $ 120,000

Sales Direct materials Direct labor Factory overhead Selling expenses Admin. expenses Total expenses Operating income

10,000 new units × $2.20 = $22,000
10-71

EXAMPLE ONE
Current Business $ 1,000,000 $ 350,000 220,000 110,000 140,000 80,000 $ 900,000 $ 100,000 Additional Business $ 85,000 $ 35,000 22,000 5,000 2,000 1,000 $ 65,000 $ 20,000 Combined $ 1,085,000 $ 385,000 242,000 115,000 142,000 81,000 $ 965,000 $ 120,000

Sales Direct materials Direct labor Factory overhead Selling expenses Admin. expenses Total expenses Operating income

Even though the $8.50 selling price is less than the normal $10 selling price, JamCo should accept the offer because net income will increase by $20,000.

10-72

EXAMPLE ONE
We can also look at this decision using contribution margin.
Per Unit $ 8.50 3.50 2.20 $ 2.80 Total $ 85,000 35,000 22,000 $ 28,000 $ 5,000 2,000 1,000 20,000
10-73

Special order revenue Direct materials Direct labor Contribution margin Increase in fixed costs: Factory overhead Selling expenses Administrative expenses Special order profit

$

EXAMPLE TWO
Kaser Company produces two products and selected data is shown below:
Products 1 Selling price per unit Less: variable expenses per unit Contribution margin per unit Current demand per week (units) Contribution margin ratio Processing time required on machine A1 per unit 60 36 $ 24 2,000 40% 1.00 min. $ $ 2 50 35 $ 15 2,200 30% 0.50 min.

10-74

EXAMPLE TWO
Machine A1 is the scarce resource because there is excess capacity on other machines. Machine A1 is being used at 100% of its capacity. Machine A1 capacity is 2,400 minutes per week.

Should Kaser focus its efforts on Product 1 or 2?

10-75

EXAMPLE TWO
Let’s calculate the contribution margin per unit of the scarce resource, machine A1.
Products 1 Contribution margin per unit Time required to produce one unit Contribution margin per minute 24 ÷ 1.00 min. $ 24 $ $ ÷ 2 15 ? min. ?

10-76

EXAMPLE TWO
Let’s calculate the contribution margin per unit of the scarce resource, machine A1.
Products 1 Contribution margin per unit Time required to produce one unit Contribution margin per minute 24 ÷ 1.00 min. $ 24 $ $ 2 15 ÷ 0.50 min. $ 30

Product 2 should be emphasized. It is the more valuable use of the scarce resource, machine A1, yielding a contribution margin of $30 per minute as opposed to $24 for Product 1.
10-77

EXAMPLE TWO
Let’s calculate the contribution margin per unit of the scarce resource, machine A1.
Products 1 Contribution margin per unit Time required to produce one unit Contribution margin per minute 24 ÷ 1.00 min. $ 24 $ $ 2 15 ÷ 0.50 min. $ 30

If there are no other considerations, the best plan would be to produce to meet current demand for Product 2 and then use any capacity that remains to make Product 1.
10-78

EXAMPLE TWO
Let’s see how this plan would work.
Allotting Our Scarce Resource (Machine A1) Weekly demand for Product 2 Time required per unit Total time required to make Product 2 2,200 units 0.50 min. 1,100 min.

×

10-79

EXAMPLE TWO
Let’s see how this plan would work.
Allotting Our Scarce Resource (Machine A1) Weekly demand for Product 2 Time required per unit Total time required to make Product 2 Total time available Time used to make Product 2 2,200 units 0.50 min. 1,100 min. 2,400 min. 1,100 min. 1,300

×

10-80

EXAMPLE TWO
Let’s see how this plan would work.
Allotting Our Scarce Resource (Machine A1) Weekly demand for Product 2 Time required per unit Total time required to make Product 2 Total time available Time used to make Product 2 Time available for Product 1 Time required per unit Production of Product 1 2,200 units 0.50 min. 1,100 min. 2,400 1,100 1,300 1.00 1,300 min. min. min. min. units
10-81

×

÷

EXAMPLE TWO
According to the plan, we will produce 2,200 units of Product 2 and 1,300 of Product 1. Our contribution margin looks like this.

Production and sales (units) Contribution margin per unit Total contribution margin

Product 1 1,300 $ 24 $ 31,200

Product 2 2,200 $ 15.00 $ 33,000

The total contribution margin for Kaser is $64,200.

10-82

EXAMPLE THREE
Exitel makes computer chips used in one of its products. Unit costs, based on production of 20,000 chips per year, are:
Unit Costs Direct Material Direct Labor Variable Overhead Fixed Overhead Total $ 9.00 5.00 1.00 13.00 $ 28.00
10-83

An outside supplier has offered to provide the 20,000 chips at a cost of $25 per chip. Fixed overhead costs will not be avoided if the chips are purchased. Exitel has no alternative use for the facilities. Should Exitel accept the offer?

Should I continue to make the part, or should I buy it?

What will I do with my idle facilities if I buy the part?

10-84

EXAMPLE THREE
Differential costs of making (costs avoided if bought from outside supplier)
Unit Cost Direct Material Direct Labor Variable Overhead Total $ 9.00 5.00 1.00 $ 15.00

10-85

EXAMPLE THREE
Differential costs of making (costs avoided if bought from outside supplier)
Unit Cost Direct Material Direct Labor Variable Overhead Total $ 9.00 5.00 1.00 $ 15.00

Exitel should not pay $25 per unit to an outside supplier to avoid the $15 per unit differential cost of making the part. Fixed costs are irrelevant to decision.
10-86

EXAMPLE THREE
If Exitel buys the chips from the outside supplier, the idle facilities could be leased to another company for $250,000 per year.
Should Exitel buy the chips and lease the facilities?

10-87

EXAMPLE THREE
Disadvantage of buying 20,000 units ? ($25 - $15) Opportunity cost of facilities: The lease revenue Advantage of buying part and leasing facilities

$

200,000 250,000

$

50,000

The opportunity cost of facilities changes the decision. The real question to answer is, “what is the best use of Exitel’s facilities?”
10-88

EXAMPLE FOUR
OserCo has 10,000 defective units that cost $1.00 each to make. The units can be scrapped now for $.40 each or rebuilt at an additional cost of $.80 per unit. If rebuilt, the units can be sold for the normal selling price of $1.50 each. Rebuilding the 10,000 defective units will prevent the production of 10,000 new units that would also sell for $1.50. Should OserCo scrap or rebuild?

10-89

EXAMPLE FOUR

Sale of defects Less rebuild costs Less opportunity cost Net return

Scrap Now $ 4,000 $ 4,000

Rebuild $ 15,000

10,000 units × $0.40 per unit 10,000 units × $1.50 per unit
10-90

EXAMPLE FOUR
10,000 units × $0.80 per unit
Scrap Now $ 4,000 $ 4,000 Rebuild $ 15,000 (8,000) (5,000) 2,000

Sale of defects Less rebuild costs Less opportunity cost Net return

10,000 units × ($1.50 - $1.00) per unit
10-91

EXAMPLE FOUR
OserCo should scrap the units now.
Scrap Now $ 4,000 $ 4,000

Sale of defects Less rebuild costs Less opportunity cost Net return

Rebuild $ 15,000 (8,000) (5,000) 2,000

If OserCo fails to include the opportunity cost, the rework option would show a return of $7,000, mistakenly making rebuild appear more favorable.
10-92

EXAMPLE FIVE
Ames Co. produces two products, A and B, from this process.
Should the products be sold at split-off or processed further? Joint Cost $100,000
Common Production Process Revenue $70,000 Additional Processing $40,000 Final Sale $120,000

A
Revenue $50,000

Split-Off Point

Additional Processing $20,000

Final Sale $65,000
10-93

B

EXAMPLE FIVE
Incremental Revenue $ 50,000 15,000 Incremental Cost $ 40,000 20,000

Product A B

Difference $ 10,000 (5,000)

Product A incremental revenue = $120,000 - $70,000 Product B incremental revenue = $65,000 - $50,000

Decision: Process product A, but sell product B at the split-off point. Note that the $100,000 joint cost is irrelevant to the processing decision.
10-94

EXAMPLE FIVE
Joint costs are really common costs incurred to simultaneously produce a variety of end products. Joint costs are commonly allocated to end products on the basis of the relative sales value of each product or on some other basis.
10-95

EXAMPLE FIVE
Joint costs are not relevant in decisions regarding what to do with a product after the split-off point. As a general rule . . .
It is always profitable to continue processing a joint product after the split-off point so long as the incremental revenue exceeds the incremental processing costs.

10-96

SUMMARY: Decision Making Steps
Decision making involves five steps:
?Define the problem. ? Identify the alternatives. ? Collect information on alternatives. ? Eliminate irrelevant information. ? Make a decision with the remaining relevant
information.

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