Lecture 9 Flashcards
Decision making 5 steps
- Determine the strategic issues
- Specify the criteria and identity the alternative actions
- Analyse relevant costs
- Select and implement the best course of action
- Evaluate performance
Accepting a one one offer.
Wooden produces pic frames. Practical production capacity is 100,000
Scheduled master budget capacity is 80,000
Wholesaler buys complete production for 12 per frame
Costs per frame
Dm 4
Dl 3
Var man oh /
Fixed man of 1
Transportation 1.50
Now a craftbshop approacheed wooden with the offer to buy 15000 frames at a price of 9.5 a frame. It also offers to pick the order at the production site.
Should wooden accept the offer
Current + new production < max capacity?
80,000+15000<100,000 (no replacement)
Var costs 4+3+2 =9
Fixed costs =not relevant
Additional not relevant as getting picked up
Price is 9.5 >9 accept offer
Making a one time offer
Company produces and sells beer. One of production halls burnt down. They’d lose 100,000l. But the business dont want to lose market share.
You’re business of other beer brewery. Company asks you for price to produce 100,000l of beer. They also offer to pick up the bottles themselves
Relevant costs are the
Direct materials
Direct labour material handling costs
Outsourcing ads v dis
Outpouring pros: Profit lower production costs due to competitive advantage of suppliers (Location (lower wage) Specialised skills No fixed costs in own books
Dis:
Proprietary costs
Loss of knowledge
Employee identity and corporate culture
Conformance quality
Is the performance of a products / service according to the design and spec
Design quality
How close do characteristics of products / services match needs and wants of customers
Costs of quality
2 parts:
A) control costs ( costs incurred to prevent production of low quality)
- prevention costs (trainingsveld
Appraisal costs (inspection, product testing)
B) failure of control costs (cost arising as a result of production of low quality)
- internal failure costs (rework and retestS)
Breakdown maintenance
-external failure costs (customer support)
Outsourcing example
Offer to buy 8000 at 19 each.
Internal costs: Dm 6 Dl 4 Var oh 1 Supervisor wage 3 Dep 2 All gen oh 5 Total 21
Need to look at what are the relevant costs?
Dm 6
Dl 4
Var oh 1
Sup wage 3
Cheaper to make (14 to 19)
Constraints and bottlenecks
Bottlenecks exist when different products needs same machines (same input), in sequential production when different stages of production have different capacities
Theory of constraints: a technique where the primary goal is to maximise throughput while simultaneously maintaining or decreasing inv and operating costs
- Identify system constrain
- Decide how to maximise the output of constraint
- Subordinate everything else to this decision
- Elevate the systems bottleneck
Constraints and bottleneck example
If choosing between one product and another pick the one with the higher contribution
If you have limited time for example on bottle neck or constraint pick the one that is the quickest then allocate rest to other one
So you work out the cm for the time period then allocate that way
Eg takes 2 mins and cont is 5
Eg takes 1 min and cont is 3
You’d pick second as cont per min is 3, whereas cost per min 2.5
Constraints and bottleneck
Investments
Company can’t produce 750 units (cm =22500)
Company offers them machine for 21760. They Need to pay for machine now and receive sales in one year
Calc npv: furore chase flows - cash outflows
Cash outflow /(1+r)^n
22500/1+r -21760
Roi
Roi= income / investment
Or sales / investments * income / sales
Dis of roi
Ratio (denominator or numerator effects)
Reduction of asset base might be unwanted
Expensive investments might not be undertaken despite potentially high absolute profit
Alternative meausre with more goal congruence and less manipulability:
Residual income
Economic value added
Residual income
Income - r(cost of capital) + operating capital
