Module 2: Relevant Info and Decision Making

Question 1

what are the internal costs that can be avoided in make or buy decision?

Answer 1

typically all variable costs, any avoidable fixed costs; Note: This is PER UNIT

Question 2

what are the external costs incurred to buy in make-or-buy decision

Answer 2

costs to purchase product/service, transportation cost, any costs that are fixed wrt the number of units ordered; Note: this is PER UNIT

Question 3

how to calculate ceiling price/ max price we want to pay to outsource?

Answer 3

all internal costs avoided = VC + FC/X

Question 4

if outsourcing adds to profit, how do we determine what to do? (make-or-buy-decision)

Answer 4

1) calculate internal costs avoided and external costs added
2) if external costs added > internal costs avoided, then if internal costs avoided - external costs added + increase in profit >= 0, then the profit will increase by that much so we should outsource
3) otherwise don’t outsource

Question 5

Relevant Cost Analysis for decision to drop a product

Answer 5

if change in profit = gain - give up > 0 then we want to keep the product

Question 6

What you gain in dropping a product

Answer 6

VC of product, Attributable FC, Additional revenue (from increase sales) + saved VC and FC (from decrease sales)

Question 7

what you give up in dropping a product

Answer 7

Revenue of product, Additional VC + FC (from increase sales) + loss in revenue (from decrease sales)

Question 8

explain allocated FC

Answer 8

unavoidable, these costs will be allocated/transferred to the other products

Question 9

explain attributable FC

Answer 9

avoidable

Question 10

what to do if FC is reduced by x; what number should we use in calculating gain for dropping a product?

Answer 10

use what it is reduced by, not the reduced amount or the full amount, just the change

Question 11

what do we assume about a special order?

Answer 11

it cannot be negotiated and has to be filled in its entirety

Question 12

what is a very important thing to do when talking about SO on exams

Answer 12

talk about capacity analysis. do we have enough capacity to fill both our RO and SO? if yes, we can produce both, if no - we need to sacrifice RO, there will be OC

Question 13

explain relevant cost analysis for SO

Answer 13

what is the impact on profit. If Gain > Give up, there is an increase in profit and we should take SO

Question 14

what is the Gain of a SO

Answer 14

CM of SO

Question 15

what is the give up of a SO

Answer 15

specific FC of SO and CM of displaced RO

Question 16

how to calculate floor price for SO

Answer 16

= total cost of SO = VC + FC + OC

Question 17

how to calculate OC for SO

Answer 17

calculate OC / unit (Profit - VC) -> calculate old units displaced -> total OC = OC / unit * old units displaced -> OC / unit = Total OC / new units

Question 18

how do we find optimal production units for multiproducts?

Answer 18

find CM of each product per unit of scarce resource. then the optimal production plan would have the most amount of the product with highest CM. So allocate optimal production units with the corresponding scarce resource to get optimal production

Question 19

if we have a multiproduct business, how do we know if we should add a new SO?

Answer 19

if CM of new product is higher than the other products, if optimal production plan includes it

Question 20

define: make or buy decision

Answer 20

A decision in which managers must decide whether their companies should manufacture some parts and components for their products in-house or subcontract with another company to supply these parts and components.

Question 21

4 relevant cost analysis in decision making

Answer 21

1) make or buy decisions and outsourcing
2) decision to drop product
3) costing order decision - floor price
4) short term product mix decisions

Question 22

qualitative considerations in make-or buy decision

Answer 22

1) reliability of supplier in meeting quality and delivery requirements
2) strategic importance of activity being outsourced

Question 23

manufacturing cost 3 groups

Answer 23

1) direct materials
2) direct labour
3) manufacturing overhead

Question 24

define direct material cost

Answer 24

materials that can be traced easily to a unit of output are are of significant economic consequence to final product

Question 25

define direct labour cost

Answer 25

labour costs that can be traced easily to the creation of a unit of output

Question 26

define direct laborours

Answer 26

those who physically construct a unit of output

Question 27

define manufacturing overhead cost

Answer 27

all other costs incurred by a manufacturing facility that are not direct material or direct labor

Question 28

examples of manufacturing overhead costs

Answer 28

thread, glue

Question 29

explain decision to drop a product

Answer 29

Relevant cost analysis involves comparing the costs saved by abandoning the product with revenues forgone and discontinuance costs incurred.

Question 30

explain how analysis of what costs are avoided is difficult

Answer 30

1) Costs that are attributed to a product may only be avoidable in the intermediate or long run.
2) Sales of one product may affect sales of other products

Question 31

define: floor price

Answer 31

The floor price is the minimum price that a party to a negotiation will accept; would make company no worse off from a profit perspective

Question 32

Floor price if given incremental costs

Answer 32

sum of incremental cost / units in SO + OC if there is any

Question 33

Explain costing orders and relevant cost analysis

Answer 33

1) Order costing involves estimating the relevant costs associated with a unique order (special order).
2) Relevant cost analysis suggests that only costs that will change as a result of changing from the existing product to the proposed product should be considered

Question 34

can opportunity cost be 0 for costing orders?

Answer 34

Yes