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    Chapter 11 Part 3: Relevant Costs For Non-Routine Decision Making

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    Ailene Quinto
    The document discusses whether an ABC Company should shut down or continue operations given its current sales volume is below 50% capacity and expected to drop below 5,000 units per month. Continuing operations would result in a net loss of $0 while shutdown costs are estimated at $2,000 per month. The break-even shutdown point is calculated to be 3,000 units. The decision depends on expected future sales in comparison to the 3,000 unit shutdown point. The document also briefly discusses product pricing approaches like cost-plus pricing.

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    Chapter 11 Part 3: Relevant Costs For Non-Routine Decision Making

    Uploaded by

    Ailene Quinto
    57 views11 pages
    The document discusses whether an ABC Company should shut down or continue operations given its current sales volume is below 50% capacity and expected to drop below 5,000 units per month. Continuing operations would result in a net loss of $0 while shutdown costs are estimated at $2,000 per month. The break-even shutdown point is calculated to be 3,000 units. The decision depends on expected future sales in comparison to the 3,000 unit shutdown point. The document also briefly discusses product pricing approaches like cost-plus pricing.

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    Original Title

    Chapter 11 Part 3

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    The document discusses whether an ABC Company should shut down or continue operations given its current sales volume is below 50% capacity and expected to drop below 5,000 units per month. Continuing operations would result in a net loss of $0 while shutdown costs are estimated at $2,000 per month. The break-even shutdown point is calculated to be 3,000 units. The decision depends on expected future sales in comparison to the 3,000 unit shutdown point. The document also briefly discusses product pricing approaches like cost-plus pricing.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    57 views11 pages

    Chapter 11 Part 3: Relevant Costs For Non-Routine Decision Making

    Uploaded by

    Ailene Quinto
    The document discusses whether an ABC Company should shut down or continue operations given its current sales volume is below 50% capacity and expected to drop below 5,000 units per month. Continuing operations would result in a net loss of $0 while shutdown costs are estimated at $2,000 per month. The break-even shutdown point is calculated to be 3,000 units. The decision depends on expected future sales in comparison to the 3,000 unit shutdown point. The document also briefly discusses product pricing approaches like cost-plus pricing.

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    You are on page 1of 11

    Chapter 11 Part 3

    Relevant Costs for Non-Routine


    Decision Making
    Shut Down or Continue Operation
    Illustrative Problem 11-8
     
    The ABC Company, now operating below 50% of its practical capacity
    expects that the volume of sales will drop below the level of 5,000
    units per month. An operating statement prepared for the monthly
    sales of 5,000 units shows that following:

    Sales (5,000 units at P3) P15,000


    Less:
    Variable costs (5,000 units at P2) P10,000
    Non-variable costs 5,000 15,000 Net Income
    -0-
    Shut Down or Continue Operation
    (2)
    Assume that a conservative estimate of costs if plant
    operations are suspended indicates a shut-down cost
    of P2,000 per month. Since there is no immediate
    possibility of profit under present conditions, the
    problem of the company is the possibility of
    minimizing the loss.
     
    Required: Determine if the company should shut down
    temporarily or continue operations.
    Shut Down or Continue Operation
    Analysis: (3)
     
    The decision to continue operations or shut
    down will depend upon the expected sales of
    the company in comparison with the shut
    down point of 3,000 units computed as
    follows:
    Shut Down or Continue Operation
    (4 )
     
     
    Fixed Costs if Shut down
    Operations are - Cost
    Continued
    Shut down point= ____________________________
    Contribution Margin per unit
     
    = P5,000 - P2,000
    P1
     
    = 3,000 units
    Shut Down or Continue Operation
    (5)
     
     
    PRICING PRODUCT AND SERVICES
    Shut Down or Continue Operation
    (6)
    The pricing decision can be critical because...
    1, The prices charge for a firms products
    largely determine the quantities customers
    are willing to purchase, and
    2. The prices should be high enough to
    cover all the cost of the firm.
    Shut Down or Continue Operation
    (7)

    COST-PLUS PRICING
    Shut Down or Continue Operation
    (8)
    The Cost-Plus Pricing Formula:

    Target Selling Price = [Cost + (Mark-up


    percentage X Cost)}
    (9)
    Procedures however may be costed in at least
    two different ways:

    1. By the absorption approach – where the


    costs base is defined as the cost to
    manufacture one unit and therefore excludes
    all Selling, General and Administrative
    Expense.
    (10)

    2. By the contribution approach – where cost


    base consist of all the variable costs
    associated with a product including selling,
    general and administrative expenses.

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