25 Apr 2012
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Chapter 4 – Relavant Costs for Non Routine Operating Decisions
General Rule for Special order Decisions
Be as well off after accepting the order as we were before
Does the order replace regular business? – price should be at or above contribution
margin
Fixed cost = irrelevant, incurred regarless
Acceptable if order breaks even – minimum acceptable price is equal to the
incremental cost (most variable costs and some fixed)
General Rule for Keep or Drop Decisions
Discontinue a product/service/business segement when its total CM does not cover
fixed costs that are eliminated if the product is dropped (aka avoidable fixed costs)
Separate costs – F & V
Evaluate FCs – how would they change if product is dropped – relevant/irrelevant
INSOURCE OR OUTSOURCE
Outsourcing: practice of finding outside vendors to supply products and services
Insourcing: practice of providing a good or service from internal resources
Make or buy decisions for manufacturers
General Rule for Make or Buy Decisions
Chose the option with the lowest relevant cost
Outsourcing costs vs. incremental costs for in sourcing
Insourcing costs: include opportunity costsx
4.27 Outsourcing Computations, Uncertainties
The managers will be indifferent at the volume where the cost in-house is the same as the cost of outsourcing:
$40X + $260,000 = $48X
$8X = $260,000
X = 32,500 systems
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