How do business leaders make decisions?
How do business leaders make decisions? Chapter Seven, How Are Relevant Revenues and Costs Used to Make Decisions, will introduce us to an extremely useful and important management model: Differential analysis. Differential analysis is a method by which all the readily available data relevant to revenues and costs are identified, organized, and evaluated to arrive at a rational decision.
Reading Assignment
Chapter Seven begins by describing the differential analysis model, presenting a framework for organizing data, and then demonstrates its operation using a number of common case examples. Common situations that use differential analysis are make-or-buy decisions, retaining or dropping product-line decisions, customer-retention related decisions, and special order decisions.
Chapter 7 End-Of-Chapter Questions
*Please scroll down to the bottom section of this page to see last week’s end-of-chapter answers.
The end-of-chapter questions give you an opportunity to self-assess your knowledge of what you have learned so far. Answers to these questions will be provided in a separate section on next week’s Reading Assignment page. Each week, you are highly encouraged to create a separate heading/section in your Learning Journal, label it “End-Of-Chapter Questions,” and write your answers to these questions under that heading. Your answers to the end-of-chapter questions will not count towards your final grade, but they are still part of the UoPeople learning process and it is expected that you will answer them to ensure understanding of the materials presented in the reading. Comparing your answers with the provided correct answers the following week, will help you understand the reading better, and also help you perform better on future Graded Quizzes and the Final Exam.
Question 1: What are differential revenues and costs?
Question 2: What is differential analysis?
Question 3: Define what is meant by a “make-or-buy” decision. Describe how differential analysis can be used to assist in making this type of decision.
Question 4: What is an avoidable cost?
Question 5: How is differential analysis used in deciding whether to keep or drop product lines?
Question 6: Why are direct fixed costs typically differential costs?
Question 7: Why are allocated fixed costs typically not differential costs?
Question 8: What is an opportunity cost? Why is an opportunity cost a differential cost?
Question 9: How is differential analysis similar for customer decisions and product line decisions?
Question 10: What two important assumptions must be considered when evaluating special order scenarios?
Question 11: What is cost-plus pricing?
Question 12: Describe the four steps of target costing.
Question 13: Describe the five steps used to manage constraints according to the theory of constraints.
Question 14: What is a qualitative advantage of keeping unprofitable customers?
Question 15: What are joint products and joint costs?
Question 16: Describe the two methods of allocating joint costs.
Discussion Assignment
Wheels, Inc., currently manufactures its own custom rims for automobiles. Management is interested in outsourcing production of these rims to a reputable manufacturing company that can supply the rims for $80 per unit. Wheels, Inc., incurs the following annual production costs to produce 10,000 rims internally.
Per Unit
Total Annual Cost at 10,000 Units
Variable production costs
Direct materials
$ 20
$ 200,000
Direct labor
$ 10
100,000
Applied (and actual) factory overhead
$ 30
300,000
Fixed production costs
Factory building and equipment lease
70,000
Factory insurance
50,000
Production supervisor’s salary
100,000
Total production costs
$ 820,000
If production is outsourced, all variable production costs, factory building and equipment lease costs, and factory insurance costs will be eliminated. The production supervisor’s salary cost will remain regardless of the decision to outsource or to produce internally because the supervisor recently signed a long-term contract with Wheels, Inc.
Required:
a. Perform differential analysis using the format presented in Figure 7.2. Assume making the rims internally is Alternative 1, and buying the rims from an outside manufacturer is Alternative 2.
b. Which alternative is best? Explain.
Accounting Assignment
Quality Glass currently manufactures windshields for automobiles. Management is interested in outsourcing production of these windshields to a reputable manufacturing company that can supply the windshields for $45 per unit. Quality Glass incurs the following annual production costs to produce 15,000 windshields internally.
Per Unit
Total Annual Cost at 15,000 Units
Variable production costs
$ 8
Direct materials
$ 10
$ 120,000
Direct labor
$ 11
150,000
Applied (and actual) factory overhead
165,000
Fixed production costs
390,000
Total production costs
$ 825,000
If the production is outsourced, the costs of variable production and 80 percent of the fixed production will be eliminated. However, the company has to bare 20 percent of the fixed production costs regardless of the decision to outsource or produce internally.
Required:
a. Perform differential analysis using the format presented in Figure 7.2. Assume making windshields internally is Alternative 1, and buying windshields from an outside manufacturer is Alternative 2.
b. Which alternative is best? Explain.
c. Summarize the result of outsourcing production using the format presented in Figure 7.3.
Learning Journal
The Learning Journal is a space where you should reflect upon what was learned during the week. How it applies to your daily life and will help you with your life (career) goals. For this week’s reflection, please write three complete and well composed paragraphs (in your own words) where you use, as an example, a company that provides goods or services that are exported – or – a company that uses goods or services that are imported.
Heisinger, K., & Hoyle, J. B. (2012). Managerial Accounting. Creative Commons by-nc-sa 3.0. https://open.umn.edu/opentextbooks/textbooks/managerial-accounting
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