Question

In: Accounting

How can you apply differential analysis to make pricing decisions? What type of cost information can...

How can you apply differential analysis to make pricing decisions? What type of cost information can be included in determining prices? Give examples of the type of costs that can be included.

Solutions

Expert Solution

  1. Fixed cost are generally irrelevant cost because they are unavoidable in the short-term.
  2. Cost which has incurred in the past and cannot be recouped are not relevant. These are called Sunk cost.
  3. Revenue given up by not choosing an alternative is relevant. This is an example of opportunity cost.
  4. The cost to hire and train temporary labour is Relevant cost.x
  5. The future depreciation on new machine with the decision to replace an older fully depreciated machine is Irrelevant cost.
  6. The revenue given up by not choosing an alternative is Relevant cost
  7. The risk of substandard quality from an outside supplier with the decision to outsource Relevant cost.
  8. Variable costs that are the same for all alternatives under consideration is Irrelevant.

(B) MAKE OR BUY DECISION



Cost of producing 19,500 monitors



Cost to purchase 19,500 monitors

Difference costs/(savings) of buying 19,500 monitors

Direct materials

$ 120

$

$

Direct labor

( 67*19500)

Variable factory overhead

- Select your answer -Fixed manufacturing overheadFixed non-manufacturing overheadRedundancy costsCorrect 12 of Item 2

22.05

(57500)

- Select your answer -Outside purchase costsFixed non-manufacturing overheadMonitors in finished goods inventoryCorrect 16 of Item 2

39

-

Total costs

$ 181.06

$ 213

$

Dirct labour cost is a sunk cost since they are permanent.so we prepare statement of comparative cost.

If the company buys then there will be a saving of $67 per unit which is labour cost . Material cost will be incurred if we produce. There is a savings in variable overheads if monitors are purchased. Which is $38 per unit. Fixed manufacturing overhead reduces by $57500 which means a saving of ($57500/19500) or 2.95$ per unit. So total savings comes to

                                $67+$38+$2.95= $107.95

Total cost of production = $289-$107.95

                                                =$181.05

Hence production is a better option than manufacturing.

Annual variable costs of old machine

   Selling price of old machine

Matching lives

Purchase price of new machine

Accumulated depreciation of old machine

Irrelevant

Relevant

            Irrelevant

Relevant

Irrelevant


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