1、 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.,Chapter 10: Relevant Information for Dec
2、ision Making, 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.,Learning Objectives,What fa
3、ctors determine the relevance of information to decision making? What are sunk costs, and why are they not relevant in making decisions? What information is relevant in an outsourcing decision? How can management achieve the highest return from use of a scarce resource? What variables do managers us
4、e to manipulate sales mix? How are special prices set, and when are they used? How do managers determine whether a product line should be retained or discontinued? (Appendix) How is linear programming used to optimally manage multiple resource constraints?, 2011 Cengage Learning. All Rights Reserved
5、. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.,Relevant Costing,Relevant Costing focuses managerial attention on a decisions relev
6、ant facts Relevance Associated with the decision under consideration Important to the decision maker Connected to or bearing on some future endeavor Most variable costs are relevant Most fixed costs are not relevant, 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicat
7、ed, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.,Incremental Revenue, Cost, & Profit/Loss,Incremental Revenuethe amount of revenue that differs across decision choices Incre
8、mental Cost or Differential Costthe amount of cost that varies across decision choices Incremental Profit or Lossthe difference between incremental revenue and incremental cost, 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use
9、 as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.,Opportunity & Sunk Costs,Opportunity Costsbenefits foregone because one course of action is chosen over another Sunk Costscosts incurred in the past to acquire an
10、asset or a resource Not relevant because they cannot be changed regardless of future actions Not recoverable,SUNK COSTS ARE IRRELEVANT., 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed wi
11、th a certain product or service or otherwise on a password-protected website for classroom use.,Relevant Costing & Business Decisions,Outsourcing a product or part Allocating scarce resources Accepting special orders Determining the sales/production mix, 2011 Cengage Learning. All Rights Reserved. M
12、ay not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.,Outsourcing & Make-or-Buy Decions,Outsourcinghaving work performed for one company by
13、an off-site non-affiliated supplier Offshoringsending a job formerly performed in the home country to a foreign country Make-or-Buy decisions compare internal production and opportunity costs with purchase cost Relevant information: Strategic Economic Technological Management and human resources Mos
14、t outsourcing relates to operating costs not to strategic core competencies, 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-p
15、rotected website for classroom use., 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.,Make
16、-or-BuyQuantitative Factors,Incremental production costs per unit Cost to purchase outside Number of available suppliers Production capacity available Opportunity costs of production facilities Space available for storage Inventory carrying costs Increase in throughput from buying components, 2011 C
17、engage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.,Make-or-BuyQualitative Factors,Reliability of s
18、upply sources Ability to control quality of items purchased outside Nature/importance of the work to be subcontracted Impact on customers and markets Future bargaining position with supplier(s) Perceptions about future price changes Perceptions about current product prices, 2011 Cengage Learning. Al
19、l Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.,Outsourcing Risk Pyramid, 2011 Cengage Learning. All Rights Reserv
20、ed. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.,Services Often Outsourced,Accounting and legal services School bus programs Medic
21、alblood testing Process design activities Utilities Engineering services Employee health services, 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or oth
22、erwise on a password-protected website for classroom use.,Scare Resources,Essential to production activity but available only in limited quantity Machine hours Skilled labor hours Raw materials Production capacity,Choose product or service with highest contribution margin per unit of scarce resource
23、 When there are several limiting factors, use linear programming to choose product or service Before eliminating products or services, consider qualitative factors Company reputation Impact on customer base Market saturation Company stagnation, 2011 Cengage Learning. All Rights Reserved. May not be
24、copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.,Production Choices,Production and sale of some less profitable products may be necessary to main
25、tain either customer satisfaction or sales of other products,Low CM on razors may be required to obtain high CM on razor blades, 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a cer
26、tain product or service or otherwise on a password-protected website for classroom use.,Sales Mix Decisions,Sales Mixrelative quantities of the products that make up the total sales of a company Factors affecting sales mix: Product selling prices Sales force compensation Advertising expenditures, 20
27、11 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.,Impact of Change in Sales Price,Quantitativ
28、e Factors New contribution margin per unit of each product Changes in product demand and production volume Best use of scarce resources,Qualitative Factors Customer goodwill Customer loyalty Response of competitors Production of new products, 2011 Cengage Learning. All Rights Reserved. May not be co
29、pied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.,Pricing New Products,Consider the products entire life cycle (long run) To set prices at various s
30、tages in the products life cycle, make assumptions about: Consumer behavior Competitor behavior Pace of technology changes Government posture Environmental concerns Size of potential market Demographic changes, 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in
31、 whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.,Impact of Change in Compensation,Commission based on fixed percentage of gross sales dollar Sell highest priced product Commission
32、 based on product contribution margin Sell most profitable product When considering compensation structure Ignore fixed costs unless the fixed costs are incremental relative to the new policy or to changes in sales volume, 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or du
33、plicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.,Impact of Change in Advertising,Increase in advertising costs may cause Change in sales mix Change in sales volume Adv
34、ertising budget changes Relevant costs Increased sales revenue Increased variable costs Increased fixed costs,Irrelevant costs include Original fixed costs Contribution margin generated by the current sales levels,Incremental Revenues Less: Incremental Variable Costs equalsIncremental Contribution M
35、argin Less: Incremental Fixed Costs equalsIncremental Benefit (or Loss), 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-prote
36、cted website for classroom use.,Special Order Decisions,Sales price should cover: Variable production and selling costs Incremental fixed costs Profit,Special prices can be considered for: Unusual quantity, delivery, packaging, or customization of product One-time job such as an overseas order that
37、will not affect the domestic market,Special order decisions involve management computing a reasonable sales price for products or services not part of normal operations., 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as per
38、mitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.,Private-Label Orders, Low-Ball Bids & Ad Hoc Discounts,Private-label order Buyers name (not producers) attached to the product Accept during slack periods to use availabl
39、e capacity Fixed costs usually not allocated Variable selling costs often reduced/eliminated Sales price set to generate a positive contribution margin,Low-ball bid To introduce product or service to particular market Sales price at or below cost Cannot be continued over the long run Ad Hoc Discount
40、s Price concessions related to real (or imagined) competitive pressures rather than to the location of the merchandising chain or volume purchased, 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license dis
41、tributed with a certain product or service or otherwise on a password-protected website for classroom use.,Special Order Decisions Qualitative Factors,Impact on future prices and sales Sufficient contribution margin to justify the additional burden on workers and management Impact on scarce resource
42、s and throughput Keep workforce employed during slow times Consider Robinson-Patman Act Prohibits companies from pricing the same product at different levels when those amounts do not reflect related cost differences Requires that cost differences result from actual variations in the cost to manufac
43、ture, sell, or distribute because of different methods of production or quantities sold, 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on
44、a password-protected website for classroom use.,Product Line and Segment Decisions,Multiproduct Environments Costs by product lines Costs of divisions Distinguish between relevant and irrelevant information Commingling relevant and irrelevant information may suggest a product line/ segment is operat
45、ing at a loss when it is actually operating at a profit,Separate costs by Product Line Revenue Variable costs Avoidable direct fixed costs Unavoidable direct fixed costs Common Costs Unavoidable Direct Fixed Costs and Common Costs Will continue even if a product line or segment is eliminated Are irr
46、elevant costs when deciding to eliminate a product line or segment, 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected
47、website for classroom use.,Segment Margin Income Statement Sales Contribution MarginSegment MarginProduct Line ResultNet Income (Loss),Use segment margin to decide to continue or eliminate a segment, 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or i
48、n part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.,Product Line Decisions Beware,Proceeds from sale of equipment are relevant Costs that appear to be avoidable may not be Depreciation on equip
49、ment is irrelevant Eliminating a product may affect customers Customers seek products elsewhere due to shrinking market assortment, 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a
50、certain product or service or otherwise on a password-protected website for classroom use.,AppendixLinear Programming,Linear Programming Used to find the optimal allocation of scarce resources in a situation involving one objective and multiple limiting factors Resource constraints Demand or marketing constraints Technical product constraints Nonnegativity constraints Whole number constraints Helps managers allocate scarce resources among competing uses One objective Maximize contribution margin Minimize product cost Optimal solutionprovides best answer to allocation problem,
