differential analysis
process of estimating revenues and costs of alternative actions available to decision makers and of comparing these estimates to the status quo
short run
period of time over which capacity will be unchanged, usually one year
differential costs
with two or more alternatives, costs that differ among or between alternatives
sunk costs
costs incurred in the past that cannot be changed by present or future decisions
full cost
sum of all fixed and variable costs of manufacturing and selling a unit
special order
order that will not affect other sales and is usually a short-run occurrence
product life cycle
time from initial research and development to the time that support to the customer ends
target price
price based on customers' perceived value for the product and the price that competitors charge
target cost
equals the target price minus the desired profit margin
- target profit - target profit
predatory pricing
practice of setting price below cost with the intent to drive competitors out of business
dumping
exporting a product to another country at a price below domestic price
price discrimination
practice of selling identical goods to different customers at different prices
peak-load pricing
practice of setting prices highest when the quantity demanded for the product approaches capacity
price fixing
agreement among business competitors to set prices at a particular level
make-or-buy decision
decision concerning whether to make needed goods internally or purchase them from outside sources
contraint
activity, resource, or policy that limits or bounds the attainment of an objective
contribution margin per unit of scarce resource
contribution margin per unit of a particular input with limited availability
theory of constraints (TOC)
focuses on revenue and cost management when faced with bottlenecks
1. the rate of throughput contribution
2. minimizing investments
3. minimizing other operating costs
bottleneck
operation where the work required limits production
throughput contribution
sales dollars - direct materials costs and variables, such as energy and piecework labor
Use differential analysis to analyze decisions
- differential analysis-the process of estimating revenues and costs of alternative actions available to decision makers and of comparing these estimates to the status quo
- short run-the period of time over which capacity will be unchanged, usually one y
Understand how to apply differential analysis to pricing decisions
- variable costs must always be covered
- fixed costs must be covered in the long run
- short-run pricing decision-less than one year, pricing a one time special order
- long-run pricing decision- longer than one year, pricing a new product
- Special orde
Understand several approaches for establishing prices based on costs for long-run pricing decisions
- full cost is the total cost to produce and sell a unit
- full costs are relevant for the long term pricing decisions
- in the short run, differential costs may be very low
- in the long run, differential costs are higher than in the short run
- in the l
Understand how to apply differential analysis to production decisions
- make or buy- decision to make goods or services internally or purchase them externally
- add or drop a segment- decision to add or drop a product line or close a business unit
- product choice- decision on what products or services to offer
- constraint
Understand the theory of constraints
- theory of constraints- focuses on revenue and cost management when faced with bottlenecks
- bottleneck- operation where the work required limited production; constraining resource
- throughput contribution=
sales dollars - direct materials costs and var