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Use opportunity cost to analyze the income effects of a given alternative. The decline in resale value
due to additional miles is a relevant cost. A relevant cost is a cost that differs between alternatives. 2.
1. Identifying Relevant Costs. The most vital among these are Profit, Time and Accessibility. Models
help managers gain insight and understanding, but they can’t make decisions. In addition, as the
business desires to forge a long-term relationship with its supplier, it may desire to purchase its goods
from that supplier so as to commence the relationship. Differential cost (revenue) is the difference in
total cost (revenue) between two alternatives. A relevant cost is a cost that differs between
alternatives. 1. 2. Identifying Relevant Costs. Get in touch with your inner creative with our
downloadable resources. Competitors influence prices through their actions. This is called a make-
or-buy decision because the company must decide whether to make the product internally or buy the
product from an outside firm (often called outsourcing ). Incremental costs would not be incurred if
the part were purchased from an outside source. A relevant cost is a cost that differs between
alternatives. Prior to Flevy, Joseph worked as an Associate at BCG and holds an MBA from the
Sloan School of Management at MIT. Opportunity Cost The benefits that are foregone as a result of
pursuing some course of action. Should the company stop producing the shifters internally and buy
from outside supplier. Notes (1) 80% of the labour cost is fixedand is therefore excluded from the
contribution calculation. The output figure represents all of the outputfrom the process: Required:
Calculate the cost of sales, and gross profit for products A and B assuming: (i) joint costs are
apportioned by market value; (ii) joint costs are apportioned by production units. Cross-functional
management teams who make production, marketing, and finance decisions. There are longer-term
strategic considerations entwined with the make-or-buy decision that has great significance. Full
costs are relevant for the long-term pricing decisions. However, in reality, there are countless
intricacies associated with the relationship between various kinds of income and costs.
DIFFERENTIAL COSTS AND REVENUES Bill is currently employed as a lifeguard, but he has
been offered a job in an auto service center in the same town. TANZANIA CASE NATIONAL
BUREAU OF STATISTICS MARCH, 2014. Outline. Population Censuses in Tanzania Basic
Demographic Indicators Analysis of Census Data 2002 Census 2012 Census Challenges. Do not be
fooled by the mention of the fact that it is a fixedcost, it is a cost that is relevant to the decision to
proceed with thefuture development of the new product. If the product is dropped, it will be
reallocated to other products. In other words, below what price would Northern Optical actually be
losing money on the sale. A decision to carry out one of the activities in the value chain internally,
rather than to buy externally from a supplier is called a “make or buy” decision. Multiple Linear
Regression Analysis. Outlines. Multiple Regression Model Estimation Testing Significance of
Predictors Multicollinearity Selection of Predictors Diagnostic Plots. The use of decision criteria
allows companies to come up with a more informed and sound decision when it comes to Strategy,
Risks, and Economics.
Product and Process Design, Sourcing, Equipment Selection and Capacity Planning. Assume the
fixed costs will still be incurredif production is outsourced. For smaller quantities, businesses can go
for a “buy” decision. Should the company stop producing the shifters internally and buy from
outside supplier. Vertical Integration- Advantages Smoother flow of parts and materials Better
quality control Realize profits Vertical Integration- Disadvantage Companies may fail to take
advantage of suppliers who can create economies of scale advantage by pooling demand from
numerous companies. This has been allocated in the ratio 3:3:2. (4) Fixed cost of labour is 80%. (5)
This is the remaining 50% of overheads that can't be allocated to departments. (6) This is the
remaining 40% of expenses that can't be allocated to departments. Relevant Costs or Revenues The
predicted future costs or future revenues that differ among the alternatives being considered. You
can similarly convert our content to any other desired screen aspect ratio. When orders are down and
you're reluctant to lay off employees, deciding to produce materials in house can keep workers
employed, motivated and available as you need them. OPPORTUNITY COST- If the space now
being used to produce the shifters would be otherwise idle, then the company should continue to
produce its own shifters and the supplier’s offer should be rejected. What is the rock bottom
minimum price below which Northern Optical should not go in its negotiations with the customer. If
she chooses to drive, the gasoline cost would be incurred, so it varies, depending on the decision.
Definitions. Decision: Conclusion or judgment about some issue or matter. Do not be fooled by the
mention of the fact that it is a fixedcost, it is a cost that is relevant to the decision to proceed with
thefuture development of the new product. The make-or-buy issue is complicated which represents a
major dilemma faced by several companies. Theremaining 20% has been allocated on the basis of
sales volume. (2) Only 50% of the production overheads can be directly allocated to the departments.
Distinguish between relevant and irrelevant costs in decision making. 2. Prepare analyses for various
decision situations. In this chapter: Explaining Human Behavior Importance of Marginal Analysis
The Improper Estimation of Costs Wedding Dresses, Cheap Books and 24-hour Wal -Marts. A
relevant cost is a cost that differs between alternatives. The material is constantly used by Mr Smith
in his business. A relevant cost is a cost that differs between alternatives. 2. 1. Identifying Relevant
Costs. Cross-functional management teams who make production, marketing, and finance decisions.
Overview of the data-based decision making (DBDM) (30 minutes). Any portion of this general
overhead cost that would actually be eliminated if the gear shifters were purchased rather than made
would be relevant in the analysis. If deadlines are tight, the option to produce materials in house
allows company to continue manufacturing if parts are slow to arrive. February 12, 2015 These days
companies manufacture a lot of product varieties. You pass it, the pressure is released, and you are
not comfortable with it. The library’s facade was assembled from precast concrete panels that a
company called Pretecsa produced in a plant near Mexico City. A Contribution Margin Approach
DECISION RULE Lovell should drop the digital watch segment only if its profit would increase.
Cost Considerations in Make or Buy Decision Cost has relevance in make-or-buy decisions when all
the other factors are equal, or else reasonable cost estimates of the variations should be included to
make up for any inequality.
Here, businesses have doubts about the reliability of outsourcing partners. Profit This is Mr Smith's
minimum profit margin which he believes is necessary to cover 'general day-to-day expenses of
running a business'. In addition, some companies believe they can manage quality better by
manufacturing their own parts and materials instead of depending on the quality control standards of
external suppliers. Consider a recent decision, and how did you make that decision. In the post-
COVID-19 world, companies must now focus on making their Supply Chains Resilient, Agile, and
Smart. Charles Bailey for ACCT3310 Learning Objectives LO 4-1 Use differential analysis to
analyze decisions. Relevant costs for manufacturing the good are all the expenses that could be
avoided by not manufacturing the product in addition to the opportunity cost resulting from utilizing
production facilities to manufacture the good as against the next best alternative utilization of the
manufacturing facilities. The outcome of this analysis should be a decision that maximizes the long-
term financial outcome for a company. Further processing decision When deciding whether to
process a product further or to sell aftersplit-off only future incremental cash flows should be
considered: Any difference in revenue and any extra costs. Quality Bikes incurs the following annual
production costs to produce 2,000 racing bikes internally. Funds tied up in inventory are not
available for investment elsewhere The Make or Buy Decision A decision concerning whether an
item should be produced internally or purchased from an outside supplier is called a “make or buy”
decision. How companies price a product or service ultimately depends on the demand and supply
for itThree influences on demand and supply:CustomersCompetitorsCosts. Beware of Allocated
Fixed Costs Our allocations can make a segment look less profitable than it really is. As you can see,
the only costs that differ between the alternatives are the direct labor costs savings and the increase
in fixed rental costs. Cross-functional management teams who make production, marketing, and
finance decisions. Only those costs andrevenues that alter as a result of a decision are relevant. Key
Terms and Concepts A special order is a one-time order that is not considered part of the company’s
normal ongoing business. If the process is flawed, then the resulting decision is questionable.
Wireframe tools help conceptualize the software or application design at the initial stage. Beware of
Allocated Fixed Costs The answer lies in the way we allocate common fixed costs to our products.
There are numerous issues that affect make or buy decisions that include government regulation,
competing firms, and market trends. We need to ask what resources are required and how long it
would take to reach noticeably improved performance. Cross-functional management teams who
make production, marketing, and finance decisions. This tool is currently in development and work is
underway to refine and enhance flow and ease user interaction. Chapter Thirteen. Cost Concepts for
Decision Making. What is the contribution of each product per machine-hour. A Practical
Introduction to Management Science 5 th edition Cliff T. Ragsdale. Chapter 12. Introduction to
Simulation Using Crystal Ball. When orders are down and company is unwilling to lay off
employees, deciding to produce materials in house can keep workers employed, encouraged and
available for any requirement. Now you are free and looking for another project, so you are thinking
about applying for the PMI-RMP exam. A team of dedicated professionals are at work to help you!