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ACC 117 Lecture Notes - Lecture 24: Fixed Cost, Opportunity Cost, Sunk Costs

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tealmammoth179
4 Dec 2020
School
Tunxis Community College
Department
Accounting
Course
ACC 117
Professor
Muccino

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Document Summary

Incremental analysis: concepts incremental analysis- decisions involving a choice among alternative courses of action. Decisions processes: identify the financial data that change under alternative courses of actions, identifies the probable effects of those decisions on future earnings, gathering data may involve market analysts, engineers and accountants. Format a b net income incr. (decr. ) Management"s decision-making process frequently involves the following steps: Determine and evaluate possible courses of action. Types of decisions how to compute; which to select; income impact; and what would change your mind: accept a special order- should be accepted when incremental revenues from the order exceeds the incremental costs, offer price. Fv = future value of a single amount. Factors needed for computing: present value concepts, pv of a single amount- discounting the future amount, pv of an annuity- is the value now of a series of future receipts or payments, assuming compound interest. Formula = pv = fv / (1+i)

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Related Questions

1. Company has a capacity to produce 100,000units in a year. Usually the companyproduces and sells 80,000 units in any year. The selling price is $20.00; variableproduction cost is $8.00 per unit and total fixed cost is$400,000. This year company received arequest of special order for 15,000 units at a selling price of$15.00 per unit.

1.For eachitem below decide it is relevant or not relevant.

a. Selling price of $20.00

b. Special order price of $15.00

c. Variable production cost of $8.00

d. Fixed cost of $400,000

1.Should the company accept this specialorder? Why or why not? show calculations to support youranswer.


2.2. In makingbusiness decisions, management ordinarily considers only financialinformation. TRUE OR FALSE?

3.

3. Theprocess used to identify which financial data changes underalternative courses of action is called incremental analysis. TRUEOR FALSE?

4.

4. 4.Opportunity cost is a cost that cannot be changed by anypresent or future decision. TRUE OR FALSE?

5.

5. Asell-or-process further decision compares the total revenue to beearned and all costs of producing the product. TRUE ORFALSE?

6.

6. Sunkcosts are not relevant in incremental analysis. TRUE ORFALSE?

7.7. What is netpresent value?

a. Thedifference between the present value of net income and the capitalinvestment

b. Thedifference between the net cash flows and the capitalinvestment

c. Thedifference between the present value of net cash flows and thecapital investment

d. The difference between the net cash flows and thepresent value of the capital investment

8.8. To produce oneturkey platter, Jax Inc. uses $10 of variable and $1.50 of fixedcosts. A Peruvian wholesaler has offered to purchase 2,000 plattersat $12 each. Jax will incur special shipping costs of $0.75 perplatter if the order is accepted. Jax has sufficient unusedcapacity to produce the additional platters. What will be theeffect on net income if the special order is accepted?

a. $1000 increase

b. $2500 increase

c. $4000 increase

d. $500 decrease

Alberta Gauge Company, Ltd., a small manufacturing company in Calgary, Alberta, manufactures three
types of electrical gauges used in a variety of machinery. For many years the company has been profitable
and has operated at capacity. However, in the last two years, prices on all gauges were reduced and
selling expenses increased to meet competition and keep the plant operating at capacity. Second-quarter
results for the current year, which follow, typify recent experience.
ALBERTA GAUGE COMPANY, LTD.
Income Statement
Second Quarter
(in thousands)
Q-Gauge E-Gauge R-Gauge Total
Sales .................................................................................. $1,600 $900 $900 $3,400
Cost of goods sold .............................................................. 1,048 770 950 2,768
Gross margin ...................................................................... $ 552 $130 $ (50) $ 632
Selling and administrative expenses ..................................... 370 185 135 690
Income before taxes ............................................................ $ 182 $ (55) $(185) $ (58)
Alice Carlo, the company’s president, is concerned about the results of the pricing, selling, and
production prices. After reviewing the second-quarter results, she asked her management staff to
consider the following three suggestions:
• Discontinue the R-gauge line immediately. R-gauges would not be returned to the product line
unless the problems with the gauge can be identified and resolved.
• Increase quarterly sales promotion by $100,000 on the Q-gauge product line in order to increase
sales volume by 15 percent.
• Cut production on the E-gauge line by 50 percent, and cut the traceable advertising and promotion
for this line to $20,000 each quarter.
Jason Sperry, the controller, suggested a more careful study of the financial relationships to determine
the possible effects on the company’s operating results of the president’s proposed course of
action. The president agreed and assigned JoAnn Brower, the assistant controller, to prepare an analysis.
Brower has gathered the following information.
• All three gauges are manufactured with common equipment and facilities.
• The selling and administrative expense is allocated to the three gauge lines based on average sales
volume over the past three years.
• Special selling expenses (primarily advertising, promotion, and shipping) are incurred for each
gauge as follows:
Quarterly Advertising
and Promotion Shipping Expenses
Q-gauge ............................................................................... $210,000 $10 per unit
E-gauge ............................................................................... 100,000 4 per unit
R-gauge ............................................................................... 40,000 10 per unit
■Case 14–63
Drop a Product Line
(LO 4, 5)
Unit contribution, E-gauge:
$19.00
Chapter 14 Decision Making: Relevant Costs and Benefits 641
• The unit manufacturing costs for the three products are as follows:
Q-Gauge E-Gauge R-Gauge
Direct material ................................................................................. $ 31 $17 $ 50
Direct labor ...................................................................................... 40 20 60
Variable manufacturing overhead ...................................................... 45 30 60
Fixed manufacturing overhead .......................................................... 15 10 20
Total ................................................................................................ $131 $77 $190
• The unit sales prices for the three products are as follows:
Q-gauge ................................................................................ $200
E-gauge ................................................................................ 90
R-gauge ................................................................................ 180
• The company is manufacturing at capacity and is selling all the gauges it produces.
Required:
1. JoAnn Brower says that Alberta Gauge Company’s product-line income statement for the second
quarter is not suitable for analyzing proposals and making decisions such as the ones suggested by
Alice Carlo. Write a memo to Alberta Gauge’s president that addresses the following points.
a. Explain why the product-line income statement as presented is not suitable for analysis and
decision making.
b. Describe an alternative income-statement format that would be more suitable for analysis and
decision making, and explain why it is better.
2. Use the operating data presented for Alberta Gauge Company and assume that the president’s
proposed course of action had been implemented at the beginning of the second quarter. Then
evaluate the president’s proposal by specifically responding to the following points.
a. Are each of the three suggestions cost-effective? Support your discussion with an analysis that
shows the net impact on income before taxes for each of the three suggestions.
b. Was the president correct in proposing that the R-gauge line be eliminated? Explain your
answer.
c. Was the president correct in promoting the Q-gauge line rather than the E-gauge line?
Explain your answer.
d. Does the proposed course of action make effective use of the company’s capacity?
Explain your answer.
3. Are there any qualitative factors that Alberta Gauge Company’s management should consider
before it drops the R-gauge line? Explain your answer.