When evaluating a special order management should
Management and cost accounting: professor cooperberg
Examine the device’s characteristics and see if it can be identified. Make use of precise geolocation details. On a tablet, you can store and/or access information. Personalize your material. Make a content profile that is exclusive to you. Analyze the effectiveness of your advertisements. Easy advertising should be selected. Make a profile for personalised advertising. Choose from a variety of personalized advertisements. Use market research to learn more about the target audience. Analyze the effectiveness of your content. Enhance and create goods.
Relevant cost is a concept used in managerial accounting to describe avoidable costs that occur only when particular business decisions are made. The definition of relevant cost is used to exclude extraneous data that could stymie decision-making. Related expense, for example, is used to decide if a business unit should be sold or retained. A sunk cost is the polar opposite of a related cost, as it has already been paid regardless of the result of the current decision.
Consider a commuter who runs up to the ticket counter to buy a ticket for a flight that departs in 25 minutes. To determine the ticket price, the airline must take into account all possible costs. Almost all of the expenses associated with having the extra passenger have already been charged, including plane fuel, airport gate fees, and the entire plane’s crew’s salary and benefits. These costs are referred to as sunk costs or irrelevant costs because they have already been incurred. The airline bases its last-minute ticket pricing decision on only a few minor costs, such as labor to load the passenger’s luggage and any food served mid-flight.
Special order relevant decisions (managerial accounting
Managers use differential analysis for make-or-buy decisions, product line decisions, and consumer decisions, as we’ve already discovered. Differential analysis also provides a format for managers to use when deciding whether or not to accept customer special orders. What exactly is a special order, and how can differential analysis be used to construct one?
A special order is a one-of-a-kind order placed by a customer. As seen in the example below, differential analysis offers a format that lets managers determine whether to accept or reject special orders.
Assume Tony’s T-shirts creates jerseys for local soccer, baseball, basketball, and other sports teams. Tony, the owner, buys the shirts and has each team’s graphics printed on them. Since the graphics were produced many years ago, there are no design costs. Tony sells 1,000 shirts every month on average. The following are typical monthly financial data:
The monthly data given is for the company’s regular monthly activities. Tony was recently contacted by a representative from the local high school, who inquired about a one-time special order. The high school will be hosting a statewide track and field meet, and Tony’s T-shirts is willing to make 200 custom T-shirts for the event for $17 per shirt. This order would not affect other revenues since there is enough unused space to accommodate it. Tony, in other words, has the manufacturing space and equipment to make more T-shirts.
Make or buy decision
Special orders are often issued for both production and service companies. These special orders are typically for discounted products or services, and they are usually a one-time order that does not affect regular sales in the short term. Management must weigh multiple considerations when determining whether or not to approve a special order:
Assessing the company’s usual production potential is the starting point for making this decision. The normal capacity of a company is the maximum amount of output that can be achieved without the addition of additional manufacturing resources, such as equipment or labor. For example, if the company’s existing manufacturing capacity allows it to produce 10,000 towels each month, but it is only contracted to produce 9,000, it will be unable to accept a special one-time order for 3,000 towels without adding additional equipment or staff. The majority of businesses do not operate at full capacity; rather, they operate at average capacity, which is a term applicable to a business’s relevant range. The related range refers to the number of units that can be generated using the company’s current productive assets. Equipment capacity or labor capacity are examples of these properties. Short-term labor capacity is generally easier to raise than equipment capacity. The following example assumes that labor capacity is sufficient, so it only considers equipment capacity.
122. managerial accounting ch12 ex pt2 relevant cost
Incremental analysis, also known as marginal or differential analysis, is a method of evaluating financial data for decision-making. It identifies each alternative’s related revenues and/or costs, as well as the expected effect on future profits.
The Party Connection puts together full party kits for a variety of occasions. It’s actually running at 75% of its maximum capacity. The Party Link charges $25.00 for a packet that takes $4.50 to make. Per year, it produces and sells 84,000 packets. The following is more information:
The Party Connection has issued a special order request for 15,000 packets to be sent overseas at a cost of $20 per packet. The company’s existing activities will be unaffected by this deal. If 84,000 packets are 75% of the total capacity, 112,000 packets are 100% of the total capacity. Without modifying its current activities, the Party Connection has the capacity to prepare the 15,000 packets requested. Will this special order be approved by the Party Connection? The response would be no based on current cost data, as approving the order would result in a $7,500 loss.