Unit 5 Flashcards
relevant costs
Costs that differ between alternatives
avoidable cost
a cost that can be eliminated in whole or in part by choosing one alternative over another
these are relevant costs
irrelevant costs
1 Sunk costs
2 Future costs that do not differ between the alternatives
Special pricing decisions
- one-time only orders and/or
- orders below the prevailing market price.
special order
a one-time order that is not considered part of the company’s
normal ongoing business.
Steps to the decision-making process
Step 1: Identify the decision.
Step 2: Gather relevant information.
Step 3: Identify the alternatives.
Step 4: Weigh the evidence.
Step 5: Choose among alternatives.
Step 6: Take action.
Step 7: Review your decision & its consequences.
Importance of special order
It is an additional opportunity to generate revenue above sales goals.
Special orders typically request a lower price than normally offered and/or might include additional costs.
Making a special order decision
- compare the incremental change in revenue for the seller, against which is offset the incremental change in
costs. - consider whether there is a sufficient amount of incremental production capacity available that can be used to process the additional order
Considerations when deciding to accept a special order
- The capacity required to fulfill the special order.
- Whether the price offered by the buyer will cover the cost of producing the products.
- The role of fixed costs in the analysis.
Quantitative measure
The first stage in examining the value and impact of a special order
the contribution (which is the difference between revenue per unit and variable cost per unit).
Qualitative factors
- The effect on regular customers if their demands are not met and if they are aware that the company accepted a lower price for the same product
- Impact on the morale of employees if the company implements overtime or hire temporary workers to fulfill the special order
- Possibility of acquiring a big customer through the acceptance of special order
capacity constraints
Step 1: Determine if restricted/scarce capacity is a limiting factor
Step 2: Calculate contribution per unit
Step 3: Calculate contribution per unit of a limiting factor(s) (CULF)
Step 4: Allocate rankings for every limiting factor
Step 5: Consistent rankings-Profits are maximized by allocating scarce capacity according to ranking per unit of a limiting factor
Imperfect information exhibits what
an element of risk or uncertainty
The maximin criteria
seeks to maximize the minimum possible return
Maximax criteria
The best possible outcome will always occur and the decision-maker should select the option with the highest possible outcome.