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Chapter 26 - Incremental analysis and capital budgeting. In this chapter, the learning objectives are: Indicate the steps in management’s decision-making process, describe the concept of incremental analysis, identify the relevant costs in accepting an order at a special price, identify the relevant costs in a make-or-buy decision. | Learning Objectives Incremental Analysis and Capital Budgeting 26 Describe management’s decision-making process and incremental analysis. 1 Analyze the relevant costs in various decisions involving incremental analysis. 2 Contrast annual rate of return and cash payback in capital budgeting. 3 Distinguish between the net present value and internal rate of return methods. 4 Making decisions is an important management function. Does not always follow a set pattern. Decisions vary in scope, urgency, and importance. Steps usually involved in process include: Illustration 26-1 Management’s decision-making process LEARNING OBJECTIVE Describe management’s decision-making process and incremental analysis. 1 LO 1 In making business decisions, Considers both financial and non-financial information. Financial information Revenues and costs, and Effect on overall profitability. Nonfinancial information Effect on employee turnover The environment Overall company image. Decision-Making Process LO 1 Decisions involve a choice among alternative actions. Process used to identify the financial data that change under alternative courses of action. Both costs and revenues may vary or Only revenues may vary or Only costs may vary Incremental Analysis Approach LO 1 Alternative B Incremental revenue is $15,000 less. Incremental cost savings of $20,000 is realized. Produces $5,000 more net income. How Incremental Analysis Works Illustration 26-2 Basic approach in incremental analysis LO 1 Important concepts used in incremental analysis: Relevant cost Opportunity cost Sunk cost How Incremental Analysis Works LO 1 Sometimes involves changes that seem contrary to intuition. Variable costs sometimes do not change under alternatives. Fixed costs sometimes change between alternatives. How Incremental Analysis Works LO 1 American Express That Letter from AmEx Might Not Be a Bill No doubt every one of you has received an invitation from a credit card company to open a new account—some of you have | Learning Objectives Incremental Analysis and Capital Budgeting 26 Describe management’s decision-making process and incremental analysis. 1 Analyze the relevant costs in various decisions involving incremental analysis. 2 Contrast annual rate of return and cash payback in capital budgeting. 3 Distinguish between the net present value and internal rate of return methods. 4 Making decisions is an important management function. Does not always follow a set pattern. Decisions vary in scope, urgency, and importance. Steps usually involved in process include: Illustration 26-1 Management’s decision-making process LEARNING OBJECTIVE Describe management’s decision-making process and incremental analysis. 1 LO 1 In making business decisions, Considers both financial and non-financial information. Financial information Revenues and costs, and Effect on overall profitability. Nonfinancial information Effect on employee turnover The environment Overall company image. Decision-Making Process LO 1
