Rsm322 Final Exam

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University of Toronto St. George
Rotman Commerce
Donna Losell

Macro-economics - PEST  Political: how and what degree government intervenes in market  Tax, labour law, environmental law, trade restrictions and tariffs, political stability  Economic: economic growth, interest, exchange and inflation rates  Social: cultural aspects such as health consciousness, population growth rate, age distributions, career attitudes, emphasis on safety, other social trends  Technological: R&D, automation, rate of technological change, barriers to entry Micro-economics - Porter's 5 forces  Threat of new competition: new entrants decrease profitability  Barriers of entry, brand equity, switching cost or sunk costs, capital requirements, customer loyalty, industry profitability  Threat of substitute products or services: existence of alternative products cause customers to switch  Buyer propensity to substitutes, switching cost, relative price of subs, perceived level of differentiation, number of substitutes and ease of  Bargaining power of customers (buyers): ability of customers to put firm under pressure  Buyer to firm ratio, degree of dependency, bargaining leverage, buyer volume and switching cost, availability of subs  Bargaining power of suppliers: ability of suppliers to put firm under pressure  Supplier switching cost relative to firm, degree of differentiation on inputs, supplier vs firm ratio, supplier competition (cut out buyer),  Intensity of competitive rivalry  Sustainable competitive advantage through innovation, advertising expense, competition Strategies  Porter's categories  Cost leadership: appealing to cost conscious/value seeking  Focus on cost reduction to be able to offer lowest price while profitability  High asset turnover, low direct and indirect operating cost via high volumes limiting customization and personalization of service, fewer standard components, control over supply chain to ensure low price, lower customer loyalty, mass market, price elastic, market is large, 'push' than 'pull' production system  Product differentiation  Focus on quality control/innovation  Not price sensitive, market is competitive or saturated, customers have specific needs, firm has unique resources and capabilities that are difficult to copy, brand management,  Market niche  Distinct group with specialized need, product innovation, brand marketing, industry less vulnerable to subs or competition is weakest, custom designed, services mostly, price elastic Categories of cost drivers  Structurally related: costs related to size and scope, technology  Organizationally related: costs related to the organization of people and activities inside and externally  Activity related: costs related to actual production of units Cost allocation:  Activity based costing  Better profitability measures, decision making, process improvement, cost estimation  Assign resource costs to activities (cost drivers) and then the activity costs to the cost objects based  Volume based costing:  Assign factory overhead based on a cost driver (direct labour hour) Importance of cost estimation to help predict future costs for:  Strategic positioning  Value chain analysis  Inception to consumer  Target costing and life cycle costing  Sales life: introduction, growth, maturity and decline  Problem occurs when products have short life cycle and sales price moves quickly through all stages  Life cycle costing: from manufacturing cost to all costs (including suppliers) to ensure all costs are covered in the price  Target price = competitive price - desired profit  Product I designed to target cost Linear cost estimation methods  High low  Cost volume formula: cost = a+bx  'b' or variable per unit is calculated as (total cost at highest - lowest)/(# of units at highest - lowest)  Work measurement  Regression analysis: least of squares method regression - y=a+bx  A = fixed, intercept. X = independent variable, cost driver, b = variable cost  The learning curve is a method for cost estimation when learning is present. The learning rate is the average amount cost falls as output doubles from previous level. β  The form of the model is: Y = αХ  Y = average time per unit output producing X units, α = time required for first unit of output, X = cumulative output and β = learning index  Learning rate is Y/a and the learning index (β ) is ln(learning rate)/ln(%increase in output/100) Cost-volume-profit analyses  p * Q = F + v*Q + N where:  p = unit selling price  Q = units sold  F = total fixed cost  v = unit variable cost  N = operating profit  Contribution margins (p-v)  Contribution margin ratio ([p-v]/p)  If we separate fixed costs into those fixed by volume (fVB) and those fixed by driver (fAB), CVP model is now Q=(fVB+N)/(p-v-[vAB/b]) where b = batch Sensitivity analysis  Break even analysis (using CVP)  What if analysis: calculation of an amount given different levels  Margin of safety = planned sales - breakeven sales Operating leverage  = Total Contribution margin/operating profit  Higher value = higher sensitivity of profits to change in volume  Dominant firms choose high leverage opt
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