Question

Triad Children's Center (TCC), a non-profit organization, uses relevant cost analysis to determine whether new services are desirable. TCC is looking at adding a new educational program for grade school children who are having difficulty with their reading and math skills. The following relevant costs are expected if the program is accepted: Costs (per year) Program Director salary $ 39,000 Part-time Assistants $ 28,000 Variable cost per child $ 900 TCC estimates that a maximum of 40 children will participate in this program in the first year. If TCC decides to implement this program, funding will be received from the City Chamber of Commerce ($50,000) and a local Private University Endowment Fund ($35,000). Calculate the expected surplus or deficit from operations given the above information.

Answer 1

Answer:

Triad Children's Center (TCC), Relevant Cost Analysis:

Computation of Surplus or Deficit in Funding Program:

Funds from City Chamber of Commerce =$50,000

Funds from Private University Endowment = $35,000

Total Expected Funds = $85,000

Less Incremental Costs:

Program Director Salary = $39,000

Part-time Assistants' Salaries = $28,000

Variable cost per child = $36,000 ($900 x 40)

Total = $103,000

Deficit = $18,000

Explanation:

Relevant Cost Analysis is a managerial accounting term.  It tries to remove non-avoidable costs from decision-making data, leaving only data pertaining to costs that could be avoided.

It is also known as incremental analysis or differentiation analysis or marginal analysis.  The idea is to eliminate sunk costs which had already been incurred without relevance to the decision at hand.

In the present case, all the given costs are relevant to the decision, since the costs will be incurred as a result of creating this new program.

Relevant cost analysis is used widely in business decisions.  For example, if a business wants to make an item or buy it from outside suppliers, accept special offers, and open or close a unit.