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ACCOUNTING
Tools for Business Decision-Making
Third Canadian Edition
Weygandt-Kimmel-Kieso-Aly
Prepared by:
Jerry Zdril,
CGA CHAPTER 7
7
CHAPTER
Incremental Analysis
Study Objectives
1. Identify the steps in managements decision-making process.
2. Describe the concept of incremental analysis.
3. Identify the relevant costs in accepting an order at a special price.
4. Identify the relevant costs in a make-or-buy decision.
5. Identify the relevant costs in deciding whether to sell or process materials
further.
6. Identify the relevant costs in deciding whether to retain or replace
equipment.
7. Identify the relevant costs in deciding whether to eliminate an unprofitable
segment.
8. Determine the sales mix when a company has limited resources.
Prepared by:
Jerry Zdril, CGA CHAPTER 7
Managements
Decision-Making Process
Does not always follow a set pattern or process
Decisions vary in scope
Decisions vary in urgency and importance
However some steps can be identified:
Nonfinancial information
Effect of decision on employee turnover
Environment
Overall image of company
a. the
manufacturing costs that will be
saved.
b. the purchase price of the units.
c. opportunity costs.
d. all of the above.
22 Copyright John Wiley & Sons Canada, Ltd. CHAPTER 7
Lets Review: Solution
a. the
manufacturing costs that will be
saved.
b. the purchase price of the units.
c. opportunity costs.
d. all of the above.
23 Copyright John Wiley & Sons Canada, Ltd. CHAPTER 7
Incremental Analysis
Sell or Process Further
Decision Rule:
Process further as long as the incremental
revenue from such processing exceeds the
incremental processing costs
Sunk costs
already incurred and cannot be changed
Irrelevant for sell or process further decisions
Joint costs are sunk costs for sell or process
further decisions.
29 Copyright John Wiley & Sons Canada, Ltd. CHAPTER 7
Incremental Analysis
Sell or Process Further
Multiple-Product Case: Continued
Marais Creamery Decision Example
Sell cream and skim milk
or
Process them further before selling
Variable costs:
Decrease from $160,000
to $125,000 annually
a
(4 years x $160,000) b
(4 years x $125,000)
a. A relevant cost
b. A non-incremental cost
c. An opportunity cost
a. A relevant cost
b. A non-incremental cost
c. An opportunity cost
Incremen
Continue Eliminate
Sales $100,000 $ -0-
Variable expenses 90,000 -0-
Contribution margin 10,000 -0-
Fixed expenses 30,000 30,000
Net income $(20,000) $(30,000)
Decrease in net income is due to Champs
contribution margin of $10,000 that will not
be realizedDo
if the segment is discontinued
Decision: not eliminate
Champ.
44 Copyright John Wiley & Sons Canada, Ltd. CHAPTER 7
Lets Review
and community
Low morale
Employee turnover
a. Employee satisfaction
c. Customer satisfaction
a. Employee satisfaction
c. Customer satisfaction
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