Incremental Analysis .


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Incremental Analysis. . Management\'s Decision-production Process. . Outline 9-1. Consider both monetary and nonfinancial information.Nonfinancial data relates to:Effect of choice on worker turnoverThe environmentOverall picture of organization in group.. Incremental Analysis. Some of the time both expenses and incomes vary.Sometimes just incomes vary.Sometimes just expenses change..
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Administrative Accounting Second Edition Weygandt/Kieso/Kimmel Prepared by: Ellen L. Sweatt Georgia Perimeter College ELS

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Incremental Analysis

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Illustration 9-1 Management\'s Decision-production Process Consider both money related and nonfinancial data. Nonfinancial data identifies with: Effect of choice on representative turnover the earth Overall picture of organization in group.

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Incremental Analysis Sometimes both expenses and incomes change. Once in a while just incomes change. At times just expenses differ.

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Illustration 9-2 Incremental Analysis The way toward distinguishing the money related information that change under option blueprints. Alternative Alternative Net Income A B Increase (Decrease) Revenues $125,000 $110,000 $(15,000) Costs 100,000 80,000 20,000 Net income $ 25,000 $ 30,000 $ 5,000

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Illustration 9-3

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Types of Incremental Analysis Accept a request at an exceptional cost. Make or purchase segment parts or completed items. Offer items or process encourage. Hold or supplant gear. Kill an unfruitful business portion.

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Illustration 9-4 Reject Accept Net Income Order Order Increase (Decrease) Revenues $ - 0- $22,000 $ 22,000 Costs - 0- 16,000 (16,000) Net income $ - 0- $ 6,000 $ 6,000 Accept An Order At A Special Price Assume offers of the items in different markets would not be influenced by exceptional request. Expect organization is not working at full limit.

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Illustration 9-5 Make or Buy Assume offers of the items in different markets would not be influenced by unique request. Accept organization is not working at full limit.

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Illustration 9-5 Direct materials $ 50,000 Direct labor 75,000 Variable assembling overhead 40,000 Fixed assembling overhead 60,000 Total assembling costs $225,000 Total cost per unit ($225,000  25,000) $9.00 Make or Buy COST TO MAKE Alternatively, Baron may buy the start changes from Ignition, Inc., at a cost of $8 per unit. Address : Should Baron make or purchase the start switches?

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Illustration 9-6 Net Income Make Buy Increase (Decrease) Direct materials $ 50,000 $ - 0 - $ 50,000 Direct labor 75,000 - 0 - 75,000 Variable assembling costs 40,000 - 0 - 40,000 Fixed assembling costs 60,000 50,000 10,000 Purchase cost - 0- 200,000 (200,000) Total yearly cost $225,000 $250,000 $ (25,000) Decision : Barton Company will cause $25,000 of extra expenses by purchasing the switches. Hence, Barton ought to keep on making the switches. Make or Buy

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Opportunity cost The potential advantage that might be gotten from taking after an option game-plan.

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Illustration 9-7 Make or Buy - Opportunity Cost Assume the organization can utilize the discharged ability to create $ 28,000 extra pay. Net Income Make Buy Increase (Decrease) Total yearly cost $225,000 $250,000 $(25,000) Opportunity cost 28,000 - 0 - 28,000 Total cost $253,000 $250,000 $ 3,000 Decision : It is presently beneficial to purchase the switches. Barton will spare $3,000 worth of expenses with this option.

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Illustration 9-8 Direct materials $ 15 Direct labor 10 Variable assembling overhead 6 Fixed assembling overhead 4 Total assembling costs $35 Sell or Process Further? An, Inc. makes tables. The cost to make an unfinished table is $35. Unfinished units offer for $50. Completed tables offer for $60 each. For a completed table direct materials and direct work expenses will increment $2 and $4, separately. Variable overhead will increment by $2.40 (60% of direct work). There will be no expansion in settled overhead. Address : Should An, INC. offer the unfinished tables or process them advance?

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Illustration 9-9 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 assembling overhead 6.00 8.40 (2.40) Fixed assembling overhead 4.00 - 0 - Total $35.00 $43.40 $(8.40) Net pay per unit $15.00 $16.60 $ 1.60 Sell or Process Further? Handle further the length of the incremental income from such preparing surpasses the incremental handling costs.

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Joint expenses For joint items, all expenses caused before the time when two items are independently identifiable.

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Illustration 9-10 Sell/Process Further-Multiple Products Use Incremental Analysis to Decide .

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Sunk cost The book estimation of the old machine is a sunk cost which is a cost that can\'t be changed by any present or future choice. Sunk expenses are not applicable in incremental investigation.

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Retain or Replace Equipment Jeffcoat Company has a production line machine with a book estimation of $40,000 and a staying valuable existence of four years. Another machine is accessible for $120,000 and is relied upon to have zero rescue an incentive toward the finish of its 4-year helpful life. In the event that the new machine is obtained, variable assembling expenses are relied upon to diminish from $160,000 to $125,000 yearly and the old unit will be rejected. Address : Should Jeffcoat Company hold or supplant the machine?

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Illustration 9-14 Net Income Retain Replace Increase (Decrease) Variable assembling costs $640,000 a $500,000 b $140,000 New machine cost 120,000 (120,000 ) Total $640,000 $620,000 $ 20,000 a (4 years x $160,000) b (4 years x $125,000) Retain or Replace Equipment Decision : It would be to the organization\'s preference to supplant the hardware. The lower variable assembling costs because of substitution more than balance the cost of the new hardware.

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Eliminate An Unprofitable Segment Often settled costs apportioned to the unrewarding portion must be consumed by alternate sections. It is feasible for net pay to diminishing when an unbeneficial portion is disposed of.

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Illustration 9-15 Pro Master Champ Total Sales $800,000 $300,000 $100,000 $1,200,000 Variable costs 520,000 210,000 90,000 820,000 Contribution margin 280,000 90,000 10,000 380,000 Fixed costs 80,000 50,000 30,000 160,000 Net income $200,000 $ 40,000 $(20,000) $ 220,000 Eliminate An Unprofitable Segment Martina Company fabricates tennis racquets in three models: Pro, Master, and Champ. Ace and Master are productive lines, though Champ works at a misfortune . Consolidated pay explanation information are: Question : Should the Champ portion be killed?

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Illustrations 9-15&9-16 Pro Master Champ Total Sales $800,000 $300,000 $100,000 $1,200,000 Variable costs 520,000 210,000 90,000 820,000 Contribution margin 280,000 90,000 10,000 380,000 Fixed costs 80,000 50,000 30,000 160,000 Net income $200,000 $ 40,000 $(20,000) $ 220,000 Pro Master Total Sales $800,000 $300,000 $1,100,000 Variable costs 520,000 210,000 730,000 Contribution margin 280,000 90,000 370,000 Fixed costs 100,000 60,000 160,000 Net income $200,000 $ 40,000 $ 210,000 ELIMINATE CHAMP? Wipe out An Unprofitable Segment Decision: Total net wage diminishes $10,000 ($220,000 – $210,000) if the Champ line is ceased.

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Illustrations 9-15&9-16 Pro Master Total Sales $800,000 $300,000 $1,100,000 Variable costs 520,000 210,000 730,000 Contribution margin 280,000 90,000 370,000 Fixed costs 100,000 60,000 160,000 Net income $200,000 $ 40,000 $ 210,000 ELIMINATE CHAMP? Expert Master Champ Total Sales $800,000 $300,000 $100,000 $1,200,000 Variable costs 520,000 210,000 90,000 820,000 Contribution margin 280,000 90,000 10,000 380,000 Fixed costs 80,000 50,000 30,000 160,000 Net income $200,000 $ 40,000 $(20,000) $ 220,000 Eliminate An Unprofitable Segment Decision: Total net salary diminishes $10,000 ($220,000 – $210,000) if the Champ line is ended.

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Illustrations 9-17 Net Income Continue Eliminate Increase (Decrease Sales $100,000 $ - 0 - $(100,000) Variable costs 90,000 - 0 - 90,000 Contribution margin 10,000 - 0 - (10,000) Fixed costs 30,000 30,000 - 0 - Net income $(20,000) $ 30,000) $ (10,000) Eliminate An Unprofitable Segment Decision: Total net wage diminishes $10,000 ($220,000 – $210,000) if the Champ line is stopped. Then again

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Joint items Multiple final results created from a solitary crude material and a typical procedure.

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Sales Mix The relative blend in which an organization\'s items are sold.

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Unit Data VCRs TVs Selling price $500 $800 Variable expenses 300 400 Contribution margin $200 $400 Sales mix 3 1 Illustration 9-18 Sales Mix

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Illustration 9-21 Limited Resources Collins Co. produces grand and standard pen and pencil sets. The restricted asset is machine limit, which is 3,600 hours for every month. Applicable information comprises of: Deluxe Standard Contribution edge per unit $8 $6 Machine hours required per unit .4 .2 Question : Should Collins Co. move its business blend toward luxurious or standard sets?

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Illustration 9-22 Limited Resources Deluxe Standard Contribution edge per unit (a) $8 $6 Machine hours required per unit (b) .4 .2 Contribution edge for each unit of constrained asset (a 

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