Escolar Documentos
Profissional Documentos
Cultura Documentos
Chapter 13
Learning Objective 1
McGraw-Hill/Irwin
Slide 2
McGraw-Hill/Irwin
Slide 3
Sunk costs.
alternatives.
McGraw-Hill/Irwin
Slide 4
McGraw-Hill/Irwin
Slide 5
Slide 6
$24,000
$24,000 cost
cost $10,000
$10,000 salvage
salvage value
value 5 years
McGraw-Hill/Irwin
Slide 7
7
8
9
10
11
12
13
McGraw-Hill/Irwin
$ 0.026
$
104
????
$
40
????
????
$
25
Slide 8
Slide 9
Slide 10
McGraw-Hill/Irwin
Slide 11
Slide 12
McGraw-Hill/Irwin
Slide 13
McGraw-Hill/Irwin
Current
Situation
$
200,000
Situation
With New
Machine
$
200,000
Differential
Costs and
Benefits
-
70,000
40,000
10,000
120,000
80,000
70,000
25,000
10,000
105,000
95,000
15,000
15,000
62,000
62,000
18,000
62,000
3,000
65,000
30,000
(3,000)
(3,000)
12,000
Slide 14
Situation
With New
Machine
$
200,000
McGraw-Hill/Irwin
Differential
Costs and
Benefits
15,000
15,000
(3,000)
(3,000)
12,000
Slide 15
Slide 16
Learning Objective 2
Prepare an analysis
showing whether a product
line or other business
segment should be
dropped or retained.
McGraw-Hill/Irwin
Slide 17
Adding/Dropping Segments
One of the most
important decisions
managers make is
whether to add or drop
a business segment.
Ultimately, a decision
to drop an old segment
or add a new one is
going to hinge primarily
on the impact the
decision will have on
net operating income.
McGraw-Hill/Irwin
Adding/Dropping Segments
Due to the declining popularity of digital
watches, Lovell Companys digital
watch line has not reported a profit for
several years. Lovell is considering
discontinuing this product line.
McGraw-Hill/Irwin
Slide 19
McGraw-Hill/Irwin
Slide 20
Adding/Dropping Segments
Segment Income Statement
Digital Watches
Sales
Less: variable expenses
Variable manufacturing costs
Variable shipping costs
Commissions
Contribution margin
Less: fixed expenses
General factory overhead
Salary of line manager
Depreciation of equipment
Advertising - direct
Rent - factory space
General admin. expenses
Net operating loss
McGraw-Hill/Irwin
$ 500,000
$ 120,000
5,000
75,000
$ 60,000
90,000
50,000
100,000
70,000
30,000
200,000
$ 300,000
400,000
$ (100,000)
Slide 21
Adding/Dropping Segments
Segment Income Statement
Digital Watches
Sales
$ 500,000
Less:
variable
expenses
An
investigation
has
An
investigation
has revealed
revealed that
that the
the fixed
fixed
Variable manufacturing costs
$ 120,000
general
factory
overhead
general
factorycosts
overhead and
and fixed
fixed general
general
Variable
shipping
5,000
administrative
be
by
Commissions
75,000
200,000
administrative expenses
expenses will
will not
not
be affected
affected
by
Contribution
margin
$ 300,000
dropping
digital
dropping the
the
digital watch
watch line.
line. The
The fixed
fixed general
general
Less: fixed expenses
factory
overhead
and
general
administrative
factory
overhead
and
general
administrative
General factory overhead
$ 60,000
expenses
expenses
assigned
to this
this product
product
would be
be
Salary
of line assigned
manager to
90,000 would
Depreciation
of equipment
50,000
reallocated
to
lines.
reallocated
to other
other product
product
lines.
Advertising - direct
100,000
Rent - factory space
70,000
General admin. expenses
30,000
400,000
Net operating loss
$ (100,000)
McGraw-Hill/Irwin
Slide 22
Adding/Dropping Segments
Segment Income Statement
Digital Watches
Sales
$ 500,000
Less: variable expenses
The
used
to
Variable
manufacturing
$ 120,000
The equipment
equipment
usedcosts
to manufacture
manufacture
Variable
shipping
costs
5,000
digital
watches
has
digital
watches
has no
no resale
resale
Commissions
75,000
200,000
value
or
alternative
use.
value or alternative use.
Contribution margin
$ 300,000
Less: fixed expenses
General factory overhead
$ 60,000
Salary of line manager
90,000
Depreciation of equipment
50,000
Should
retain
Should Lovell
Lovell
retain or
or drop
drop
Advertising - direct the digital watch
100,000segment?
the digital watch
segment?
Rent - factory space
70,000
General admin. expenses
30,000
400,000
Net operating loss
$ (100,000)
McGraw-Hill/Irwin
Slide 23
$ (300,000)
260,000
$ (40,000)
RRe
ettaai
inn
McGraw-Hill/Irwin
Slide 24
McGraw-Hill/Irwin
Slide 25
contribution
contribution margin.
margin.
McGraw-Hill/Irwin
Slide 26
McGraw-Hill/Irwin
Slide 27
McGraw-Hill/Irwin
Slide 28
McGraw-Hill/Irwin
Slide 29
McGraw-Hill/Irwin
Slide 30
McGraw-Hill/Irwin
Slide 31
McGraw-Hill/Irwin
Slide 32
McGraw-Hill/Irwin
Slide 33
Learning Objective 3
McGraw-Hill/Irwin
Slide 34
McGraw-Hill/Irwin
Slide 35
Better quality
control
Realize profits
McGraw-Hill/Irwin
Slide 36
Slide 37
Direct materials
Direct labor
Variable overhead
Depreciation of special equip.
Supervisor's salary
General factory overhead
Unit product cost
McGraw-Hill/Irwin
9
5
1
3
2
10
$ 30
Slide 38
Should
Should we
we accept
accept the
the suppliers
suppliers offer?
offer?
McGraw-Hill/Irwin
Slide 39
Slide 40
The
The depreciation
depreciation of
of the
the special
special equipment
equipment represents
represents aa sunk
sunk
cost.
cost. The
The equipment
equipment has
has no
no resale
resale value,
value, thus
thus its
its cost
cost and
and
associated
associated depreciation
depreciation are
are irrelevant
irrelevant to
to the
the decision.
decision.
McGraw-Hill/Irwin
Slide 41
Not
Not avoidable;
avoidable; irrelevant.
irrelevant. IfIf the
the product
product is
is
dropped,
dropped, itit will
will be
be reallocated
reallocated to
to other
other products.
products.
McGraw-Hill/Irwin
Slide 42
Slide 43
Opportunity Cost
An opportunity cost is the benefit that is
foregone as a result of pursuing some course
of action.
Opportunity costs are not actual cash outlays
and are not recorded in the formal accounts of
an organization.
How would this concept potentially relate to the
Essex Company?
McGraw-Hill/Irwin
Slide 44
Learning Objective 4
Prepare an analysis
showing whether a special
order should be accepted.
McGraw-Hill/Irwin
Slide 45
Slide 46
Special Orders
Jet, Inc. makes a single product whose normal selling
price is $20 per unit.
McGraw-Hill/Irwin
Slide 47
Special Orders
$8 variable cost
McGraw-Hill/Irwin
Slide 48
Special Orders
If Jet accepts the special order, the incremental revenue
will exceed the incremental costs. In other words, net
operating income will increase by $6,000. This
suggests that Jet should accept the order.
Increase
Increase
Increase
$ 30,000
24,000
$ 6,000
Slide 49
Quick Check
Northern Optical ordinarily sells the X-lens for $50.
The variable production cost is $10, the fixed
production cost is $18 per unit, and the variable
selling cost is $1. A customer has requested a
special order for 10,000 units of the X-lens to be
imprinted with the customers logo. This special
order would not involve any selling costs, but
Northern Optical would have to purchase an
imprinting machine for $50,000.
(see the next page)
McGraw-Hill/Irwin
Slide 50
Quick Check
What is the rock bottom minimum price below which
Northern Optical should not go in its negotiations
with the customer? In other words, below what price
would Northern Optical actually be losing money on
the sale? There is ample idle capacity to fulfill the
order and the imprinting machine has no further use
after this order.
a. $50
b. $10
c. $15
d. $29
McGraw-Hill/Irwin
Slide 51
Quick Check
What is the rock bottom minimum price below which
Northern Optical should not go in its negotiations
with the customer? In other words, below what price
would Northern Optical actually be losing money on
the sale? There is ample idle capacity to fulfill the
order and the imprinting machine has no further use
after this order.
a. $50
b. $10
c. $15
d. $29
McGraw-Hill/Irwin
$100,000
+ 50,000
$150,000
10,000
$15
Slide 52
Learning Objective 5
McGraw-Hill/Irwin
Slide 53
Slide 54
McGraw-Hill/Irwin
Slide 55
McGraw-Hill/Irwin
Slide 56
Should
Should Ensign
Ensign focus
focus its
its efforts
efforts on
on
Product
Product 11 or
or Product
Product 2?
2?
McGraw-Hill/Irwin
Slide 57
Quick Check
How many units of each product can be
processed through Machine A1 in one minute?
Product 1
a.
b.
c.
d.
McGraw-Hill/Irwin
1 unit
1 unit
2 units
2 units
Product 2
0.5 unit
2.0 units
1.0 unit
0.5 unit
Slide 58
Quick Check
How many units of each product can be
processed through Machine A1 in one minute?
Product 1
a.
b.
c.
d.
1 unit
1 unit
2 units
2 units
Product 2
0.5 unit
2.0 units
1.0 unit
0.5 unit
McGraw-Hill/Irwin
Slide 59
Quick Check
What generates more profit for the
company, using one minute of machine A1
to process Product 1 or using one minute of
machine A1 to process Product 2?
a. Product 1
b. Product 2
c. They both would generate the same
profit.
d. Cannot be determined.
McGraw-Hill/Irwin
Slide 60
Quick Check
With one minute of machine A1, we could make 1
unit of Product 1, with a contribution margin of
What generates more profit for the
$24, or 2 units of Product 2, each with a
company, using one minute of machine A1
contribution margin of $15.
to process Product 1 or using one minute of
machine A1 to
Product
2 process
$15 = $30
> $24 2?
a. Product 1
b. Product 2
c. They both would generate the same
profit.
d. Cannot be determined.
McGraw-Hill/Irwin
Slide 61
Slide 62
Ensign
Ensign can
can maximize
maximize its
its contribution
contribution margin
margin
by
by first
first producing
producing Product
Product 22 to
to meet
meet customer
customer
demand
demand and
and then
then using
using any
any remaining
remaining
capacity
capacity to
to produce
produce Product
Product 1.
1. The
The
calculations
calculations would
would be
be performed
performed as
as follows.
follows.
McGraw-Hill/Irwin
Slide 63
McGraw-Hill/Irwin
2,200
2,200
0.50
0.50
units
units
min.
min.
1,100
1,100 min.
min.
Slide 64
McGraw-Hill/Irwin
2,200
2,200
0.50
0.50
units
units
min.
min.
1,100
1,100 min.
min.
2,400
2,400
1,100
1,100
1,300
1,300
min.
min.
min.
min.
min.
min.
Slide 65
McGraw-Hill/Irwin
2,200
2,200
0.50
0.50
units
units
min.
min.
1,100
1,100 min.
min.
2,400
2,400
1,100
1,100
1,300
1,300
1.00
1.00
1,300
1,300
min.
min.
min.
min.
min.
min.
min.
min.
units
units
Slide 66
Product 1
1,300
$
24
$ 31,200
Product 2
2,200
$
15
$ 33,000
Slide 67
Quick Check
Colonial Heritage makes reproduction colonial
furniture from select hardwoods.
Chairs
Selling price per unit
$80
Variable cost per unit
$30
Board feet per unit
2
Monthly demand
600
Tables
$400
$200
10
100
Slide 68
Quick Check
Colonial Heritage makes reproduction colonial
furniture from select hardwoods.
Chairs
Selling price per unit
$80
Variable cost per unit
$30
Board feet per unit
2
Monthly demand
600
Tables
$400
$200
10
100
Quick Check
Chairs
Selling price per unit
$80
Variable cost per unit
$30
Board feet per unit
2
Monthly demand
600
Tables
$400
$200
10
100
McGraw-Hill/Irwin
Slide 70
Quick
Chairs Tables
$ 80 $ 400
Check Selling price
Variable cost
30
200
Chairs Tables
Contribution
margin $ 50 $ 200
Selling price per unit
$80
$400
feet $30
10
Variable cost Board
per unit
$200 2
per board foot
$10 25 $ 20
Board feet perCM
unit
2
Monthly demand
600
100
Production of chairs
600
The companysBoard
supplier
of hardwood
feet required
1,200
will only be able
to feet
supply
2,000800
board
Board
remaining
feet this month.
What
plan
Board
feet per
tablewould10
maximize profits?
Production of tables
80
McGraw-Hill/Irwin
Slide 71
Quick Check
As before, Colonial Heritages supplier of hardwood
will only be able to supply 2,000 board feet this
month. Assume the company follows the plan we
have proposed. Up to how much should Colonial
Heritage be willing to pay above the usual price to
obtain more hardwood?
a. $40 per board foot
b. $25 per board foot
c. $20 per board foot
d. Zero
McGraw-Hill/Irwin
Slide 72
Quick Check
As before, Colonial Heritages supplier of hardwood
The
additional
wood
would
used
make
will only
be able to
supply
2,000 be
board
feetto
this
month.
Assume
the company
follows
the
planofwe
tables.
In this
use, each
board
foot
have proposed.
to how
much
Colonial
additional
woodUp
will
allow
the should
company
to earn
Heritage
be willing
above the usual
priceand
to
an
additional
$20toofpay
contribution
margin
obtain more hardwood?
profit.
a. $40 per board foot
b. $25 per board foot
c. $20 per board foot
d. Zero
McGraw-Hill/Irwin
Slide 73
Managing Constraints
It is often possible for a manager to increase the capacity of a
bottleneck, which is called relaxing (or elevating) the constraint,
in numerous ways such as:
1. Working overtime on the bottleneck.
2. Subcontracting some of the processing that would be done
at the bottleneck.
3. Investing in additional machines at the bottleneck.
4. Shifting workers from non-bottleneck processes to the
bottleneck.
5. Focusing business process improvement efforts on the
bottleneck.
6. Reducing defective units processed through the bottleneck.
These methods and ideas are all consistent with the Theory
of Constraints, which was introduced in Chapter 1.
McGraw-Hill/Irwin
Slide 74
Learning Objective 6
Prepare an analysis
showing whether joint
products should be sold at
the split-off point or
processed further.
McGraw-Hill/Irwin
Slide 75
Joint Costs
In some industries, a number of end
Slide 76
Joint Products
Oil
Joint
Input
Common
Production
Process
Gasoline
Chemicals
Split-Off
Point
McGraw-Hill/Irwin
For example,
in the petroleum
refining industry,
a large number
of products are
extracted from
crude oil,
including
gasoline, jet fuel,
home heating oil,
lubricants,
asphalt, and
various organic
chemicals.
Slide 77
Joint Products
Joint costs
are incurred
up to the
split-off point
Joint
Input
Common
Production
Process
Oil
Gasoline
Chemicals
Split-Off
Point
McGraw-Hill/Irwin
Separate
Processing
Final
Sale
Final
Sale
Separate
Processing
Final
Sale
Separate
Product
Costs
Slide 78
Slide 79
Slide 80
lumber
lumber and
and sawdust
sawdust are
are the
the immediate
immediate joint
joint
products.
products.
Unfinished
Unfinished lumber
lumber is
is sold
sold as
as is
is or
or processed
processed
further
further into
into finished
finished lumber.
lumber.
Sawdust
Sawdust can
can also
also be
be sold
sold as
as is
is to
to gardening
gardening
wholesalers
wholesalers or
or processed
processed further
further into
into prestoprestologs.
logs.
McGraw-Hill/Irwin
Slide 81
McGraw-Hill/Irwin
Per Log
Lumber
Sawdust
$
140
$
40
270
176
50
50
24
20
Slide 82
McGraw-Hill/Irwin
Slide 83
McGraw-Hill/Irwin
270
140
130
50
80
Sawdust
50
40
10
20
(10)
Slide 84
270
140
130
50
80
Sawdust
50
40
10
20
(10)
Slide 85
Slide 86
End of Chapter 13
McGraw-Hill/Irwin
Slide 87