Specific Managerial Problems and the Accounting Numbers

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There are three cases and one journal article in this lesson. The purpose is to give you practice relating the four course themes to specific managerial problems and the accounting numbers used to help solve them.

Integration is the 5th theme of the course

Sales Equivalency: Given the following statement:

Sales 1000 100%

Direct Costs 600 60%

Gross Profit 400 40%

Indirect Costs 300 30%

Net Income 100 10%

Smedlap Co. has two choices:

1. Re-direct advertising and increase Sales by 20%

2. Reduce indirect costs by 10%

If Sales increases by 200 then the result on income is an increase of 20 (10% * 200).

However, if costs decrease by 30 (10% * 300) then income increases by 30

This 30 increase in income is the Sales equivalent of:

30 / .1 = 300 Sales

Adding Expected Values (Probabilities)

Example: Smedlap is considering the following:

* An advertising campaign costing 15 000

* A cost reduction program re-organization program costing 4 000

Current sales 100 000

Costs 90 000

Income 10 000

The advertising campaign is expected to increase sales by 30% (probability = .8)

Cost reduction program will reduce costs by 10% (probability = .7)

Advertise Cut Costs

Sales 100 000 100 000

Additional 24 000

Costs 100 000 90 000

Less reduction (6 300)

Advertising 15 000

Cost of Cost reduction 4 000

Income 9 000 12 300

Notice that in the first case, sale increased by 30 000 * 0.8 and that in the second case, costs decreased by (10% * 90 000) * .7

Laird Polytechnic Institute (case)

Shows how difficult it can be to distinguish between the short and long term and, more importantly, between small and large decisions.

Blackjack (case)

On the surface, the case is about activity-based costing and activity-based management (ABC/ABM).

à It is also about controlling agency costs.

Jones Company (case)

The