Marginal Analysis-M4

Question 1

What are qualitative factors considered relevant for decision making in make or buy analysis?

Answer 1

• Whether the outsourced part can be manufactured to the required level of quality.
• Loss of confidentiality and trade secrets.
• An outside supplier may not be able to meet specific deadlines or have the same priorities as the purchaser.

Question 2

What is relevant items to consider in marginal analysis decisions?

Answer 2

• Variable Cost
• Avoidable FC
• SP of prior item and its replacement
• Marginal costs are relevant and include all variable costs and any avoidable fixed costs associated with a decision.
• Opportunity cost is the cost of foregoing the next best alternative when making a decision. The costs are relevant since the company has alternative courses of action.

Sunk and Joint cost is not relevant cost

Question 3

How to determine to accept a S.O. at full capacity?

Answer 3

• If the selling price is greater than the variable cost per unit of the special order (at full capacity) plus the contribution margin per unit of the next best alternative (the opportunity cost), then the company will accept the special order.

Question 4

How to determine to accept a S.O. at excess capacity?

Answer 4

• At excess capacity a S.O. will be accepted as long as the SP > VC per unit.
• At full capacity, S.O. will be accepted as long as the SP > VC per unit + the opportunity cost (CM) of the next best alternative per unit.

Question 5

How to determine to keep or drop a segment?

Answer 5

• Depends on whether the CM of the segment in question exceeds avoidable FC (that wouldn’t exist if the segment did not exist).
• Unavoidable FC (irrelevant cost) will be incurred regardless of whether or not the segment is kept, so they are not factored into the decision.

Question 6

How are cost evaluated to make decisions?

Answer 6

Relevant costs are those costs that will change in response to the selection of different courses of action.

• Differential costs represent the change in costs associated with two separate courses of action.
• Avoidable costs represent the costs that can be averted by selecting different courses of action.
• Incremental costs represent the change in cost associated with different alternatives.

Question 7

What is the relavance of cost to a particular decision?

Answer 7

• Is determined by potential effect on the decision.
• Relevant costs are expected future costs that vary with the action taken.

Question 8

What is oppurtunity cost?

Answer 8

• Opportunity cost is the potential benefit lost by selecting a particular course of action.
• If idle space has no alternative use, there is no benefit
  foregone; opportunity cost is zero.