ACFI1001 Lecture Notes - Lecture 10: Net Present Value, Weighted Arithmetic Mean, Taipei Metro
Decision making is the process of identifying different courses of action and selecting one
appropriate to a given situation
An effective decision-making model is one that focuses on relevant factors that differ between
alternatives
Relevant costs are avoidable or can be eliminated by choosing one alternative over another e.g.
buying a car with a CD changer versus buying a car without one
Sunk costs are costs that have already been incurred. They cannot be avoided and are irrelevant.
Opportunity costs are benefits forgone by choosing one alternative over another. They are relevant.
Ethics and decision making:
• To exceed government limits?
• To falsify records?
• To ignore product safety?
Accounting professional and ethical standards board:
• Jointly subscribed to by the three main Professional Accounting bodies (ICAA, CPA and IPA).
• There are five ethical principles:
- Integrity
- Objectivity
- Professional Competence and Due Care
- Confidentiality
- Professional Behaviour
Example – McDonalds:
• Analysed sales and costs – found 80% of business came from hamburgers
• Streamlined product line, focused on low prices
• High volume & small standardised menu
• 25 items cut to 9
• Sales and profits soared
Cost-volume-profit (CVP) analysis focuses on the following factors:
1. The prices of products or services
2. The volume of products or services produced and sold
3. The per-unit variable costs
4. The total fixed costs
5. The mix of products or services produced
Traditional income statement:
• Functions i.e. product costs versus period costs
Contribution margin income statement:
• Behaviour i.e. variable costs versus fixed costs
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Triple Bottom Line Reporting: Balanced Scorecard:
1. Financial (compulsory) 1. Financial (profit)
2. Environment (not compulsory) 2. Customers/consumers
3. Society (not compulsory) 3. Internal Business Processes
4. Innovation – learning &
Growing
^ SUSTAINABLILITY ^
The contribution margin is the amount of a sale that contributes towards the fixed costs
I.e. Contribution margin = sales - variable costs
Contribution margin (per unit) = Contribution margin (in $) ÷ Units sold
Example:
What Contribution Margin per Unit explains:
Every unit sold adds the contribution margin per unit amount to the contribution margin and net
income increases by this same amount assuig that fixed osts dot hage
Contribution Margin Ratio = Contribution margin (in $) ÷ sales (in $)
For every dollar change in sales, contribution margin will increase or decrease by the contribution
margin ratio multiplied by the increase or decrease in sales dollars
Example:
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