Differential Analysis and Product Pricing
Chapter 12: Differential
Analysis and Product Pricing Instructor: Thomas R. Marben, CPA, MBA
Course Learning Outcomes
Examine the role of management in using accounting information for decision making.
Analyze cost as it applies to various management situations.
Apply direct materials, direct labor, and factory overhead in a job order costing system.
Apply relevant costing models in both short- term and long- term analysis.
Course Learning Outcomes
Examine the role of management in using accounting information for decision making.
Analyze cost as it applies to various management situations.
Apply direct materials, direct labor, and factory overhead in a job order costing system.
Apply relevant costing models in both short- term and long- term analysis.
Key Elements of Chapter 12
Differential analysis and management
decisions
Determine selling prices using total costs,
product cost and variable cost approaches
Reviewing the impact bottleneck
constraints on decision making
Differential Analysis
Objective of Decision
Alternative Course of
Action
Gather Relevant
Information
Make Decision
Review, Analyze &
Assess
Continue with
Operation
Differential Analysis
Sunk Costs
Differential
Revenue
Costs / Expenses
Income
Differential Analysis
Lease or Sell Old Equipment
Karnes Company has equipment to dispose:
The equipment originally cost $200,000
Accumulated depreciation is $120,000
Lease Equipment:
$160,000 Revenue
$35,000 in Expenses
Sell Equipment:
$100,000 Price
6% Commission
Differential Analysis
Differential Analysis
Differential Analysis
Discontinue Segment or Product
Differential Analysis
Differential Analysis
Differential Analysis
Make it or Buy It
Auto Manufacturer has
been buying a part for
$240 per unit.
If they were to make it
the estimate costs are:
$80 Direct Materials
$80 Direct Labor
$52 Variable Overhead
$68 Fixed Overhead
80% of Capacity
Differential Analysis
Differential Analysis
Replace Equipment
Replace Old with New?
Old Equipment:
$100,000 Book Value
5 Years Remaining
Useful Life
$25,000 Market Value
New Equipment:
$250,000 Cost
5 Year Useful Life
Reduce annual variable
costs from $225,000 to
$150,000
Differential Analysis
Differential Analysis
Differential Analysis
Process or Sell
Kerosene:
Batch Size: 4,000 Gallons
Cost per Batch: $2,400
Selling Price: $2.50 (Per Gallon)
Gasoline:
Input Batch Size: 4,000 Gallons
Evaporation: 20%
Additional Costs: $650 (Per Batch)
Selling Price: $3.50 (Per Gallon)
Differential Analysis
Differential Analysis
Special Pricing
Monthly Productive Capacity: 12,500
Current Monthly Sales: 10,000
Domestic
Selling Price: $30.00
Variable Costs (Per Unit): $12.50
Fixed Costs (Per Unit): $7.50
Export Offer:
5,000 (spread over several months)
Selling Price: $18
Differential Analysis
Pricing Concepts
Total Cost Concept
Product Cost Concept
Variable Cost Concept
Total Cost Concept UNIT VARIABLE COSTS
Direct materials $ 3.00
Direct labor 10.00
Factory overhead 1.50
Selling & admin. exp. 1.50
Total $ 16.00
FIXED COSTS
Factory overhead $50,000
Selling & admin. exp. 20,000
Total Cost Concept
Fixed Assets: $800,000
Desired Rate of Return: 20%
Product Cost Concept
UNIT VARIABLE COSTS
Direct materials $ 3.00
Direct labor 10.00
Factory overhead 1.50
Selling & admin. exp. 1.50
Total $ 16.00
FIXED COSTS
Factory overhead $50,000
Selling & admin. exp. 20,000
Product Cost Concept
Fixed Assets: $800,000
Desired Rate of Return: 20%
Variable Cost Concept
UNIT VARIABLE COSTS
Direct materials $ 3.00
Direct labor 10.00
Factory overhead 1.50
Selling & admin. exp. 1.50
Total $ 16.00
FIXED COSTS
Factory overhead $50,000
Selling & admin. exp. 20,000
Product Cost Concept
Fixed Assets: $800,000
Desired Rate of Return: 20%
Target Costing
Bottlenecks
Variable Cost Concept
Variable Cost Concept
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