MGAB03H3 Chapter : Week 9 chapter notes

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9 Jan 2011

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Chapter 4 relevant costs for non-routine operating decisions notes. Relevant costs and benefits incremental revenues from the order incremental costs (including variable and fixed cost) of filling the order opportunity cost of filling the order. N accept if: incremental revenues > relevant costs. Product line and business segment (keep or drop) decisions. N the general rule is that we discontinue a product, service, or business segment when its total contribution margin does not cover avoidable fixed costs (i. e. , fixed costs that are eliminated if the product is dropped) Relevant costs and benefits contribution margin lost if dropped fixed costs avoided if dropped contribution margin loss or gain on other products/segments. Cm loss > fc avoided + cm gain on other products/segments. N managers compare the outsourcing costs with the incremental costs for insourcing. Relevant costs and benefits cost of purchase saving on vc + avoidable fc opportunity cost (contribution margin gain from other projects)

Related Questions

46) Qualitative factors ________.

A) generally are easily measured in quantitative terms

B) are generally irrelevant for decision making

C) may include either financial or nonfinancial information

D) include customer satisfaction

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Tactical decision making

Tactical decision making means choosing among alternatives withan immediate or limited end in view. For example, a company mayaccept a special order for less than the normal selling price touse idle capacity. Tactical decisions tend to be short-runin nature; however, it should be emphasized that short-rundecisions often have long-run consequences. A general tacticaldecision-making model is outlined here.

1.	Recognize and define theproblem.
2.	Identify possible alternativesolutions to the problem, and eliminate any unfeasiblealternatives.
3.	Identify the costs and benefitsassociated with each feasible alternative. Eliminate the costs andbenefits that are not relevant to the decision.
4.	Compare the relevant costsand benefits for each alternative.
5.	Assess qualitative factors.
6.	Select the alternative with thegreatest overall benefit.

Identifying and comparing relevant costs and revenues is theheart of the tactical decision model. Relevant costs (revenues) arefuture costs (revenues) that differ across alternatives. (Revenuesare treated in the same way as costs, so we will simplify thediscussion by referring to costs.) All decisions relate to thefuture; so, only future costs can be relevant. In addition, thecost must differ from one alternative to another. If a future costis the same for more than one alternative, it has no effect on thedecision. Such a cost is an irrelevant cost.

Assume that Reeves Company is considering accepting a specialorder for $25 per unit when the normal selling price is $30 perunit. Reeves has enough excess capacity to make the order withoutdisplacing normal sales. The alternatives facing Reeves Company are(Select "Yes" for the statements that are applicable and "No" forthe items that do not apply):

Accept the special order.	- Select your answer -YesNoItem1
Reject the special order.	- Select your answer -YesNoItem2
Sell normal sales for $25 perunit.	- Select your answer -YesNoItem3

Choose which of the following are relevant in deciding whetheror not to accept the special order. (Select "Yes" for thestatements that are applicable and "No" for the items that do notapply)

$25 price.	- Select your answer -YesNoItem4
$30 normal price.	- Select your answer -YesNoItem5
Variable cost of making the unitsin the special order.	- Select your answer -YesNoItem6
Depreciation on factory equipmentused in making the special order units.	- Select your answer -YesNoItem7
Increased property taxes on thefactory building which are due while the special order would bemade.	- Select your answer -YesNoItem8

While cost and revenue information is important, otherinformation may be needed to make an informed decision. Thesenon-financial factors are termed qualitative and are often relevantin decision making. For example, in deciding whether to make acomponent in-house or purchase it from an outside supplier, thecompany may consider any difference in quality or in responsivenessto the company's production schedules.

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You receive two job offers in the same big city. The first jobis close to your parentsâ house, and they have offered to let youlive at home for a year so you wonât have to incur expenses forhousing, food, or cable TV. This job pays $49,000 per year. Thesecond job is far away from your parentsâ house, so youâll have torent an apartment with parking ($9,000 per year), buy your own food($3,500 per year), and pay for your own cable TV ($550 per year).This job pays $54,000 per year.

You still plan to do laundry at your parentsâ house one time aweek if you live in the city and plan to go into the city one timea week to visit with friends if you live at home. As a result, thecost of operating your car will be about the same either way.Additionally, your parents refuse to pay for your cell phoneservice ($690 per year), and you canât function without it.

Based on your reading, answer the given questions:

What is the net difference between the two alternativesâsalaryand net of relevant costs?

What information is irrelevant? Why?

What qualitative information is relevant to your decision?

Assume you really want to take Job #2, but you also want to liveat home to cut costs. What new quantitative and qualitativeinformation will you need to incorporate in your decision?

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MGAB03H3 Chapter : Week 9 chapter notes

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