Management Decision-Making Process and Incremental Analysis

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Controllable margin

Contribution margin minus controllable fixed costs

Direct labor

Cost of labor used in production

Direct materials

Cost of materials used in production

Purchase price

Cost of purchasing externally

Joint costs

Costs incurred before products are separately identifiable

Relevant costs

Costs that differ across alternatives and should be considered

Opportunity costs in make or buy decision

Additional costs or savings from choosing to make or buy

New fixed costs or other

Additional fixed costs or other expenses from accepting a special order

New revenue from offer price

Additional revenue from accepting a special order

New variable costs

Additional variable costs from accepting a special order

Sunk costs

Costs that have already been incurred and won't change

Accept order at special price

Deciding whether to accept an order at a lower price

Eliminate unprofitable segment or product

Deciding whether to discontinue an unprofitable part of the business

Sell or process materials further

Deciding whether to sell unfinished products or process them further

Types of decisions

Accepting special orders, make or buy, sell or process further

Replace equipment

Buying new equipment to replace existing

Make or buy decision

Choosing between producing internally or outsourcing

Repair, retain, or replace equipment

Choosing whether to keep old equipment or buy new

Financial and nonfinancial factors

Factors that can impact decision-making

Process unfinished tables further

Finishing tables and selling them at a higher price

Fixed overhead

Fixed costs not directly tied to materials or labor

Repair equipment

Fixing existing equipment

Decision-making process steps

Identify, evaluate, decide, review, and modify

Incremental analysis

Process to identify financial data that change under different options

Retain equipment

Keeping existing equipment

Opportunity costs

Lost benefit from choosing one alternative over another

Joint products

Multiple end-products from a single raw material and production process

Net earnings from special offer

Net income from accepting a special order

Buy

Outsourcing or purchasing externally

Unprofitable segment

Part of the business that is not generating profit

Make

Producing internally

Sell unfinished tables

Selling tables without further processing

Management's decision-making process

Steps to identify, evaluate, and make decisions

Capacity

The number of units a company can produce

Net income

Total revenue minus total costs

Cost concepts

Understanding relevant costs, opportunity costs, and sunk costs

Incremental analysis approach

Using incremental changes in financial data for decision-making

Variable overhead

Variable costs not directly tied to materials or labor


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