Relevant Costs & Revenues for Decision Making

Question 1

How do managers make decisions between multiple options?

Answer 1

Require relevant costs and relevant revenue info to compare.
Special consideration if something occurs out of our control.
LR, all costs are variable so all relevant.
SR, look at marginal/variable costing and revenue principles.

Question 2

Examples of Irrelevant Costs:

Answer 2

• Sunk costs, costs incurred from previous decisions
• Committed/Locked-in costs, costs that not yet incurred but will be in future due to previous decisions
• Unavoidable costs – incurrence of these cannot be saved
• Existing fixed costs
• Depreciation

Question 3

What are the Different Types of Decisions?

Answer 3

• Special orders and selling pricing
• Product mix
• Replacement of equipment
• Make or buy
• Discontinuation

Question 4

What is Special Order Selling Price?

Answer 4

One-time-order from customer. Bulk Buy.
Customer requests an order below retail price but at a large volume.

Question 5

What is Product Mix?

Answer 5

The total number of product lines and individual products/services offered by a company.

Question 6

What is Make or Buy Decision?

Answer 6

Beneficial for organisation to provide product/service internally or from outside supplier (outsourcing).

Question 7

What are the 4 Dimensions of Product Mix?

Answer 7

Width -
Number of product lines company offers.
Length -
Number of products in product mix.
Depth -
Number of product variations in a product line.
Consistency -
How product lines relate to one another.

Question 8

Why are Relevant Costs Important for One-Off Decisions (Projects)?

Answer 8

If contribution can be generated, may as well take on project and make use of spare capacity to contribute to FC.