Module 2: Relevant Info and Decision Making Flashcards
what are the internal costs that can be avoided in make or buy decision?
typically all variable costs, any avoidable fixed costs; Note: This is PER UNIT
what are the external costs incurred to buy in make-or-buy decision
costs to purchase product/service, transportation cost, any costs that are fixed wrt the number of units ordered; Note: this is PER UNIT
how to calculate ceiling price/ max price we want to pay to outsource?
all internal costs avoided = VC + FC/X
if outsourcing adds to profit, how do we determine what to do? (make-or-buy-decision)
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
Relevant Cost Analysis for decision to drop a product
if change in profit = gain - give up > 0 then we want to keep the product
What you gain in dropping a product
VC of product, Attributable FC, Additional revenue (from increase sales) + saved VC and FC (from decrease sales)
what you give up in dropping a product
Revenue of product, Additional VC + FC (from increase sales) + loss in revenue (from decrease sales)
explain allocated FC
unavoidable, these costs will be allocated/transferred to the other products
explain attributable FC
avoidable
what to do if FC is reduced by x; what number should we use in calculating gain for dropping a product?
use what it is reduced by, not the reduced amount or the full amount, just the change
what do we assume about a special order?
it cannot be negotiated and has to be filled in its entirety
what is a very important thing to do when talking about SO on exams
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
explain relevant cost analysis for SO
what is the impact on profit. If Gain > Give up, there is an increase in profit and we should take SO
what is the Gain of a SO
CM of SO
what is the give up of a SO
specific FC of SO and CM of displaced RO
how to calculate floor price for SO
= total cost of SO = VC + FC + OC
how to calculate OC for SO
calculate OC / unit (Profit - VC) -> calculate old units displaced -> total OC = OC / unit * old units displaced -> OC / unit = Total OC / new units
how do we find optimal production units for multiproducts?
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
if we have a multiproduct business, how do we know if we should add a new SO?
if CM of new product is higher than the other products, if optimal production plan includes it
define: make or buy decision
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.
4 relevant cost analysis in decision making
1) make or buy decisions and outsourcing
2) decision to drop product
3) costing order decision - floor price
4) short term product mix decisions
qualitative considerations in make-or buy decision
1) reliability of supplier in meeting quality and delivery requirements
2) strategic importance of activity being outsourced
manufacturing cost 3 groups
1) direct materials
2) direct labour
3) manufacturing overhead
define direct material cost
materials that can be traced easily to a unit of output are are of significant economic consequence to final product
define direct labour cost
labour costs that can be traced easily to the creation of a unit of output
define direct laborours
those who physically construct a unit of output
define manufacturing overhead cost
all other costs incurred by a manufacturing facility that are not direct material or direct labor
examples of manufacturing overhead costs
thread, glue
explain decision to drop a product
Relevant cost analysis involves comparing the costs saved by abandoning the product with revenues forgone and discontinuance costs incurred.
explain how analysis of what costs are avoided is difficult
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
define: floor price
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
Floor price if given incremental costs
sum of incremental cost / units in SO + OC if there is any
Explain costing orders and relevant cost analysis
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
can opportunity cost be 0 for costing orders?
Yes
