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Learning Objectives
After studying this chapter, you should be able to:
[1] Identify the steps in management’s 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 determining whether to sell or process materials
further.
[6] Identify the relevant costs to be considered in repairing, retaining, or replacing
equipment.
[7] Identify the relevant costs in deciding whether to eliminate an unprofitable
segment or product.
7-1
Preview of Chapter 7
Managerial Accounting
Sixth Edition
Weygandt Kimmel Kieso
7-2
Management’s Decision-Making Process
Illustration 7-1
Financial information
► Revenues and costs, and
Non-financial information
► Effect on employee turnover
► The environment
Relevant cost.
Opportunity cost.
Sunk cost.
Review Question
Incremental analysis is the process of identifying the financial
data that
7-11
Types of Incremental Analysis
Accept
or
Reject?
7-15 LO 3
Types of Incremental Analysis
Make or Buy
Illustration: Baron Company incurs the following annual costs in
producing 25,000 ignition switches for motor scooters.
Illustration 7-5
Make or Buy
Illustration 7-6
Review Question
In a make-or-buy decision, relevant costs are:
c. Opportunity costs.
7-22 LO 4
(b) Will your answer be different if the released productive capacity
will generate additional income of $5,000?
7-23 LO 4
7-24
Types of Incremental Analysis
Decision Rule:
Joint product costs are sunk costs and thus not relevant to the sell-
or-process further decision.
7-28 LO 5
Types of Incremental Analysis
7-29 LO 5
Types of Incremental Analysis
7-31 LO 5
Types of Incremental Analysis
Marais should
shouldor
orshould
shouldnot
notprocess
processthe
themilk
milkfurther?
further?
Review Question
The decision rule is a sell-or-process-further decision:
Process further as long as the incremental revenue from
processing exceeds:
Retain or Replace?
7-39 LO 7
Types of Incremental Analysis
Review Question
If an unprofitable segment is eliminated:
7-42 LO 7
7-43
Other Considerations in Decision-Making
Qualitative Factors
Potential effects of decision on existing employees and
the community.
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