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Introduction to Management ing
©2008 Prentice Hall Business Publishing, Introduction to Management ing 14/e, Horngren/Sundem/Stratton/Sch Horngren/Sundem/Stratton/Sc
Introduction to Management ing Chapter 5
Relevant Information for Decision Making with a Focus on Pricing Decisions
©2008 Prentice Hall Business Publishing, Introduction to Management ing 14/e, Horngren/Sundem/Stratton/Sch Horngren/Sundem/Stratton/Sc
Learning Objective 1
The Concept of Relevance Relevant information depends on the decision being made. Decision making is choosing among several courses of action.
Relevant information is the predicted future costs and revenues that differ among the alternatives.
©2008 Prentice Hall Business Publishing, Introduction to Management ing 14/e, Horngren/Sundem/Stratton/Sch Horngren/Sundem/Stratton/Sc
The Concept of Relevance ants should use two criteria to determine whether information is relevant: 1. Information must be an expected revenue or cost and... 2. it must have an element of difference among the alternatives.
©2008 Prentice Hall Business Publishing, Introduction to Management ing 14/e, Horngren/Sundem/Stratton/Sch Horngren/Sundem/Stratton/Sc
Learning Objective 3
Relevance of Alternate Income Statements Cordell Company makes and sells 1,000,000 seat covers. Total manufacturing cost is $30,000,000, or $30 per unit.
Direct Material Costs are $14,000,000 Direct-labor costs are $6,000,000
©2008 Prentice Hall Business Publishing, Introduction to Management ing 14/e, Horngren/Sundem/Stratton/Sch Horngren/Sundem/Stratton/Sc
Absorption Approach
Schedule 1: Variable Costs (in thousands of dollars) Supplies (lubricants, expendable tools, coolants, sandpaper Materials-handling labor (forklift operators) Repairs on manufacturing equipment Power for factory 200 Schedule 2: Fixed Costs Managers’ salaries in factory Factory employee training 180 Factory picnic and holiday party Factory supervisory salaries Depreciation, plant and equipment 3,600 Property taxes on plant 300 Insurance on plant $ 6,000 Total indirect manufacturing costs $10,000
$ 600 2,800 400 $ 4,000 $ 400 20 1,400 100
©2008 Prentice Hall Business Publishing, Introduction to Management ing 14/e, Horngren/Sundem/Stratton/Sch Horngren/Sundem/Stratton/Sc
Absorption Approach
Schedule 3: Selling Expenses (in thousands of dollars) Variable Sales Commission $1,400 Shipping Expenses for products sold 600 $2,000 Fixed Advertising $1,400 Sales salaries 2,000 Other 600 $4,000 Total Selling Expenses $6,000 Schedule 4: istrative Expenses Variable Some clerical wages $160 Computer time rented 40 $200 Fixed Office supplies 200 Other salaries 400 Depreciation on office facilities 200 Public ing fees 80 Legal fees 200 Other 720 1,800 Total istrative expenses $ ©2008 Prentice Hall Business Publishing, Introduction to Management ing 14/e, Horngren/Sundem/Stratton/Sch Horngren/Sundem/Stratton/Sc
Absorption Approach Sales (in thousands of dollars) Less: Manufacturing costs of good sold Direct Materials Direct Labor Indirect Manufacturing (Schedule 1 plus 2) 30,000 Gross Margin or Gross Profit Selling expenses (Schedule 3) istrative expenses (Schedule 4) Total selling and istrative expenses Operating income
$40,000 6,000
$ 14,000 10,000 $ 6,000 2,000
10,000 8,000
$2,000
©2008 Prentice Hall Business Publishing, Introduction to Management ing 14/e, Horngren/Sundem/Stratton/Sch Horngren/Sundem/Stratton/Sc
Contribution Approach Internal (management ing) reporting that emphasizes the distinction between variable and fixed costs for the purpose of better decision making. Cordell Company Contribution Form of the Income Statement For the Year Ended December 31, 2007 (000)
Sales (1,000,000 units) Less: Variable expenses Manufacturing $24,000 Selling and istrative 2,200 Contribution margin Less: Fixed expenses Manufacturing $ 6,000 Selling and istrative 5,800 Operating income
$40,000 26,200 $13,800 11,800 $ 2,000
©2008 Prentice Hall Business Publishing, Introduction to Management ing 14/e, Horngren/Sundem/Stratton/Sch Horngren/Sundem/Stratton/Sc
Learning Objective 4
Special Sales Orders
Cordell Company makes and sells 1,000,000 seat covers. Total manufacturing cost is $30,000,000, or $30 per unit. Cordell is offered a special order of $26 per unit for 100,000 units.
©2008 Prentice Hall Business Publishing, Introduction to Management ing 14/e, Horngren/Sundem/Stratton/Sch Horngren/Sundem/Stratton/Sc
Special Sales Order Accepting the special order: 1. would not affect Cordell’s regular business. 2. would not raise any antitrust issues. 3. would not affect total fixed costs. 4. would not require additional variable selling and istrative expenses.
5. would use some otherwise idle manufacturing cap
©2008 Prentice Hall Business Publishing, Introduction to Management ing 14/e, Horngren/Sundem/Stratton/Sch Horngren/Sundem/Stratton/Sc
Special Sales Order
Only variable manufacturing costs are affected by this particular order, at a rate of $24 per unit ($24,000,000 ÷ 1,000,000 units). All other variable costs and all fixed costs are unaffected and thus irrelevant.
©2008 Prentice Hall Business Publishing, Introduction to Management ing 14/e, Horngren/Sundem/Stratton/Sch Horngren/Sundem/Stratton/Sc
Special Sales Order Special order sales price/unit Increase in manufacturing costs/unit Additional operating profit/unit
$26 24 $ 2
Based on the preceding analysis, should Cordell accept the order?
$2 × 100,000 = $200,000 additional profit
©2008 Prentice Hall Business Publishing, Introduction to Management ing 14/e, Horngren/Sundem/Stratton/Sch Horngren/Sundem/Stratton/Sc
Special Sales Order Cordell Company Contribution Form of the Income Statement For the Year Ended December 31, 2007 (000) Without Effect of special order special order 1,000,000 units Total Per Unit Sales $40,000,000 $2,600,000 $26 Less: Variable expenses Manufacturing $24,000,000 $2,400,000 $24 Selling and istrative 2,200,000 Total variable expenses 26,200,000 $2,400,000 Contribution margin $13,800,000 $ 200,000 Less: Fixed expenses Manufacturing $ 6,000,000 Selling and istrative 5,800,000 Total fixed expenses 11,800,000 Operating income $ 2,000,000
With special order 1,100,000 un $42,600,000
$26,400, 2,200, $28,600,000 $14,000,000
$6,000,000 5,800, 11,800,000 $2,200,000
©2008 Prentice Hall Business Publishing, Introduction to Management ing 14/e, Horngren/Sundem/Stratton/Sch Horngren/Sundem/Stratton/Sc
The End
End of Chapter 5
©2008 Prentice Hall Business Publishing, Introduction to Management ing 14/e, Horngren/Sundem/Stratton/Sch Horngren/Sundem/Stratton/Sc
©2008 Prentice Hall Business Publishing, Introduction to Management ing 14/e, Horngren/Sundem/Stratton/Sch Horngren/Sundem/Stratton/Sc
Introduction to Management ing Chapter 5
Relevant Information for Decision Making with a Focus on Pricing Decisions
©2008 Prentice Hall Business Publishing, Introduction to Management ing 14/e, Horngren/Sundem/Stratton/Sch Horngren/Sundem/Stratton/Sc
Learning Objective 1
The Concept of Relevance Relevant information depends on the decision being made. Decision making is choosing among several courses of action.
Relevant information is the predicted future costs and revenues that differ among the alternatives.
©2008 Prentice Hall Business Publishing, Introduction to Management ing 14/e, Horngren/Sundem/Stratton/Sch Horngren/Sundem/Stratton/Sc
The Concept of Relevance ants should use two criteria to determine whether information is relevant: 1. Information must be an expected revenue or cost and... 2. it must have an element of difference among the alternatives.
©2008 Prentice Hall Business Publishing, Introduction to Management ing 14/e, Horngren/Sundem/Stratton/Sch Horngren/Sundem/Stratton/Sc
Learning Objective 3
Relevance of Alternate Income Statements Cordell Company makes and sells 1,000,000 seat covers. Total manufacturing cost is $30,000,000, or $30 per unit.
Direct Material Costs are $14,000,000 Direct-labor costs are $6,000,000
©2008 Prentice Hall Business Publishing, Introduction to Management ing 14/e, Horngren/Sundem/Stratton/Sch Horngren/Sundem/Stratton/Sc
Absorption Approach
Schedule 1: Variable Costs (in thousands of dollars) Supplies (lubricants, expendable tools, coolants, sandpaper Materials-handling labor (forklift operators) Repairs on manufacturing equipment Power for factory 200 Schedule 2: Fixed Costs Managers’ salaries in factory Factory employee training 180 Factory picnic and holiday party Factory supervisory salaries Depreciation, plant and equipment 3,600 Property taxes on plant 300 Insurance on plant $ 6,000 Total indirect manufacturing costs $10,000
$ 600 2,800 400 $ 4,000 $ 400 20 1,400 100
©2008 Prentice Hall Business Publishing, Introduction to Management ing 14/e, Horngren/Sundem/Stratton/Sch Horngren/Sundem/Stratton/Sc
Absorption Approach
Schedule 3: Selling Expenses (in thousands of dollars) Variable Sales Commission $1,400 Shipping Expenses for products sold 600 $2,000 Fixed Advertising $1,400 Sales salaries 2,000 Other 600 $4,000 Total Selling Expenses $6,000 Schedule 4: istrative Expenses Variable Some clerical wages $160 Computer time rented 40 $200 Fixed Office supplies 200 Other salaries 400 Depreciation on office facilities 200 Public ing fees 80 Legal fees 200 Other 720 1,800 Total istrative expenses $ ©2008 Prentice Hall Business Publishing, Introduction to Management ing 14/e, Horngren/Sundem/Stratton/Sch Horngren/Sundem/Stratton/Sc
Absorption Approach Sales (in thousands of dollars) Less: Manufacturing costs of good sold Direct Materials Direct Labor Indirect Manufacturing (Schedule 1 plus 2) 30,000 Gross Margin or Gross Profit Selling expenses (Schedule 3) istrative expenses (Schedule 4) Total selling and istrative expenses Operating income
$40,000 6,000
$ 14,000 10,000 $ 6,000 2,000
10,000 8,000
$2,000
©2008 Prentice Hall Business Publishing, Introduction to Management ing 14/e, Horngren/Sundem/Stratton/Sch Horngren/Sundem/Stratton/Sc
Contribution Approach Internal (management ing) reporting that emphasizes the distinction between variable and fixed costs for the purpose of better decision making. Cordell Company Contribution Form of the Income Statement For the Year Ended December 31, 2007 (000)
Sales (1,000,000 units) Less: Variable expenses Manufacturing $24,000 Selling and istrative 2,200 Contribution margin Less: Fixed expenses Manufacturing $ 6,000 Selling and istrative 5,800 Operating income
$40,000 26,200 $13,800 11,800 $ 2,000
©2008 Prentice Hall Business Publishing, Introduction to Management ing 14/e, Horngren/Sundem/Stratton/Sch Horngren/Sundem/Stratton/Sc
Learning Objective 4
Special Sales Orders
Cordell Company makes and sells 1,000,000 seat covers. Total manufacturing cost is $30,000,000, or $30 per unit. Cordell is offered a special order of $26 per unit for 100,000 units.
©2008 Prentice Hall Business Publishing, Introduction to Management ing 14/e, Horngren/Sundem/Stratton/Sch Horngren/Sundem/Stratton/Sc
Special Sales Order Accepting the special order: 1. would not affect Cordell’s regular business. 2. would not raise any antitrust issues. 3. would not affect total fixed costs. 4. would not require additional variable selling and istrative expenses.
5. would use some otherwise idle manufacturing cap
©2008 Prentice Hall Business Publishing, Introduction to Management ing 14/e, Horngren/Sundem/Stratton/Sch Horngren/Sundem/Stratton/Sc
Special Sales Order
Only variable manufacturing costs are affected by this particular order, at a rate of $24 per unit ($24,000,000 ÷ 1,000,000 units). All other variable costs and all fixed costs are unaffected and thus irrelevant.
©2008 Prentice Hall Business Publishing, Introduction to Management ing 14/e, Horngren/Sundem/Stratton/Sch Horngren/Sundem/Stratton/Sc
Special Sales Order Special order sales price/unit Increase in manufacturing costs/unit Additional operating profit/unit
$26 24 $ 2
Based on the preceding analysis, should Cordell accept the order?
$2 × 100,000 = $200,000 additional profit
©2008 Prentice Hall Business Publishing, Introduction to Management ing 14/e, Horngren/Sundem/Stratton/Sch Horngren/Sundem/Stratton/Sc
Special Sales Order Cordell Company Contribution Form of the Income Statement For the Year Ended December 31, 2007 (000) Without Effect of special order special order 1,000,000 units Total Per Unit Sales $40,000,000 $2,600,000 $26 Less: Variable expenses Manufacturing $24,000,000 $2,400,000 $24 Selling and istrative 2,200,000 Total variable expenses 26,200,000 $2,400,000 Contribution margin $13,800,000 $ 200,000 Less: Fixed expenses Manufacturing $ 6,000,000 Selling and istrative 5,800,000 Total fixed expenses 11,800,000 Operating income $ 2,000,000
With special order 1,100,000 un $42,600,000
$26,400, 2,200, $28,600,000 $14,000,000
$6,000,000 5,800, 11,800,000 $2,200,000
©2008 Prentice Hall Business Publishing, Introduction to Management ing 14/e, Horngren/Sundem/Stratton/Sch Horngren/Sundem/Stratton/Sc
The End
End of Chapter 5
©2008 Prentice Hall Business Publishing, Introduction to Management ing 14/e, Horngren/Sundem/Stratton/Sch Horngren/Sundem/Stratton/Sc
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