S2c - decision making

Question 1

what are relevant costs terminology

Answer 1

Relevant costs and revenues = those that will be effected by the decision
Relevant cost = future costs that differ between alternatives
Irrelevant cost = sunk cost, allocated common fixed costs and future costs that do not differ between alternatives
Book value of equipment is sunk - cannot be changed for any alternative
Opportunity cost = lost contribution to profits arising from the best alternative foregone
Identify: future cost, differentiate

Question 2

what are limiting factors

Answer 2

shortage of skilled labour, materials, equipment or space
Profit is maximised when the greatest possible contribution profit is obtained each time the scarce or limiting factor
When they exist:
Rank the products by the contribution per unit of the constraining factor
The capacity of the scarce resource should be allocated to this ranking

Question 3

what is outsourcing

Answer 3

obtaining goods from outside suppliers instead of producing the same goods or providing the same services

Question 4

what is discontinuation decision

Answer 4

periodic profitability can highlight unprofitable activities that require a more detailed appraisal to ascertain whether or not they should be discontinued
Segment, sales territory, products, customers