ACCT20001 Lecture Notes - Lecture 9: Carhartt, Outsourcing, Regular Clergy
5 Jun 2018
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Lecture 9
Relevant costs and decision-making:
Time-consuming
Harder to process
Exercise 12.11
Accepting the order increases income by 69000 Euros
Therefore, do it
Analysis of special order:
Tactical short-term decision-making: special order
Variable cost of sales commission: included as relevant even though it is fixed because it is one-off
Long-term customer potential special order positive
Idle capacity: no opportunity cost between regular orders and special orders
May improve customer relationships for future profitability
If Xucla Meca.. Is a big player in marketplace, may have positive reputational impact
The increase in capacity utilisation may improve employee morale
Transparency of pricing costs: industries that are more inclined to do this this will affect
relationships with customers therefore do not take special order
Industry characteristics matter: if word will get out, it wont be fair
Therefore, do not always proceed with financially-optimal decision
FFI:
Make-or-buy decision
Outcome: not taking up offer
165000 total costs for taking up offer (buy)
160000 total costs for not taking up offer (make)
Alternative 1: relevant incremental cost if make:
Direct materials: 20000
Direct labour: 55000
Variable OH: 45000
Fixed OH: 40000
Total: 160000
Alternative 2: relevant incremental cost if buy:
Purchase cost: 180000
Rental income: 15000
Total: 165000
What is the fundamental reason that rental income is not included in alternative 1?
It is still an opportunity cost
Only under alternative 2, have we freed up space that enables us to receive the rent
It is impractical under alternative 1 as no space
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Document Summary
Accepting the order increases income by 69000 euros. Variable cost of sales commission: included as relevant even though it is fixed because it is one-off. Idle capacity: no opportunity cost between regular orders and special orders. If xucla meca is a big player in marketplace, may have positive reputational impact. The increase in capacity utilisation may improve employee morale. Transparency of pricing costs: industries that are more inclined to do this this will affect relationships with customers therefore do not take special order. Industry characteristics matter: if word will get out, it wont be fair. Therefore, do not always proceed with financially-optimal decision. 165000 total costs for taking up offer (buy) 160000 total costs for not taking up offer (make) Only under alternative 2, have we freed up space that enables us to receive the rent. It is impractical under alternative 1 as no space. Cost of making is lower than buying >> therefore, make.
