Week 8-12 Flashcards
To accept or reject a SPECIAL order is a common decision that managers must make. What factors should be considered when making such a decision?
- The incremental revenue and incremental costs must be caluclated- Whether there is any excess capacity
What are incremental revenues and costs?
The additional revenue/costs that will be gained/incurred as a result of choosing one course of action over another.
Note: Fixed costs are IRRELEVANT as they remain the same regardless of whether a special order is accepted or not.
When should a special order be accepted (i.e. when there is and isnt spare capacity)
Generally, where there is excess capacity and i. revenues exceed i. costs, the order should be accepted. When there is no excess capacity, the opportunity costs associated with the production of an existing product to take on the special order must be considered.
What are some of the qualitative factors that should be considered when deciding on whether to accept a special order?
- impact on capcity
- impact on quality and customer perception of quality
- impact on exiting customers
- social/environmental impacts
- long term consequences(reputation or brand recognition issues)
To ‘make or buy’ (A.K.A Insource or outsource) a product is a key decision that managers must make. What must be considered when making such a decision?
Avoidable and unavoidable costs must be considered. i.e. only the avoidable costs that will not be incurred in the future if a particular decision is made are relevant (i.e. compare the outsouring costs with the incremental costs of insourcing - only avaoidable FC’s are relevant). The decision should be made based on which option has the lowest relevant avoidable costs.
Note: these factors are also relevant for a competitive bidding situation when determining prices.
What is the main difference betwen outsourcing decisions and make or buy product decisions?
Outsourcing decisions tend to be more LONG TERM.
What factors must be considered when considering a “keep or drop product/department” decision?
Factor in relevant variable costs as well as unavoidable fixed costs (e.g. fixed costs that are eliminate if the product is dropped e.g. employee salary).
Only where operating income for the firm increases should the decision go ahead.
What are joint products? How should a decision be made regarding whether to sell now or process further (common sense)?
Two or more products produced simultaneously from the one production process. Such products cannot be seperated prior to split off.
Products should only be processed further where the incremental revenue is more than incremental costs (additional processing costs)
How should constrained resources (e.g. limits on capacity) impact decision making?
where there are no constraints, the products with the highest CM should be emphasised.
Where there ARE constraints, CM should be maximised within the constraint otherwise, extra costs should be incurred to relax the constraint.
What are some limitations of non-routine operating decisions?
- Short term profit are emphasised rather than long term
- quality of information? (due to uncertainties, information timeliness, analysis assumptions)
- decision maker bias
What is the theory of constraints?
A method of analysing the weakest link in the chain (the constraint) that limites the system from achieving higher performance.
The constraint is then managed to maximise return/throughput.
hat is the Drum-buffer-rope concept (part of the Theory of constraints concept)?
Drum = the constraint/limited resource as it determines the pace or ‘beat’ of operations. A.K.A bottle neck.
Rope - a schedule to ensure that too much inventory is not introduced into the system, it is important to start a new order only as the constraint finishes one.
Buffer - a minimal buffer of inventory kept in front of the constraints to keep production running at full capacity.
What is TQM?
An organisation wide philosophy to systematically and continuously improve the quality of products, processes and services.
‘Costs of quality’ can be classified into two categories. what are these and what sort of costs fall into each category?
- control costs - to prevent or detect poor quality. includes prevention and appraisal costs.
- Failure costs - internal and external failure costs.
Why should quality costs be measured?
To make such costs more visible (external costs are often hidden), providing opportunities to fix failures/prevent them from happening again.
What are two methods that can be used make decisions when there is uncertaintly over future outcomes?
Determine expected values
or
Use decision trees
