Finance Basics
Cost of Goods Manufactured / Decision ModelFall 2012
Objectives
The objectives of this assignment are to: a) enhance your understanding of how product costs are accumulated andhow they impact the company's net income; b) develop your skills in developing a decision model utilizing Excelspreadsheet software; and c) improve your ability to interpret the results and communicate them in writing andverbally.
Decision Model (Original data case)
You are building a decision model for Huron Corporation based on the data given in Problem #3-50 on page 123in your textbook (omit part 4). This includes a schedule of cost of goods manufactured, a schedule of cost of goods sold, and an income statement. In addition to the given data, you learn through interviews with Company management that they are considering taking one of the following two courses of action in order to improve the company's net income:
Action 1: Purchase additional factory equipment which will increase annual depreciation by $35,000.
Action 2: Reduce the number of production supervisors which will result in an indirect cost savings of $40,000.
Also, you are to assume the following events and the likelihood of the following two events occurring:
• Event 1: 50% probability that sales revenues will increase by 18%
• Event 2: 50% probability that sales revenues will decrease by 12%
Keep in mind that your decision model must incorporate the following elements:
• Company's criterion for selecting the best alternative action.
• Alternative actions that are under consideration by Company management.
• Relevant events that can happen and the likelihood of each of these events occurring.
• Possible outcomes given the various actions and events.
• Expected value of each possible outcome.