Sunk Costs
have already been incurred and cannot be changed now or in the future. These costs should be ignored when making decisions.
Relevant costs and benefits
information that is relevant for one decision may not be relevant for a different decision.
Pay attention to things that differ among alternatives
Anything that is the same under all alternatives is ignored
Decisions we will study
1. add or drop a product line or business segment
2. make or buy (insource or outsource)
3. accept a special order
4. determine the optimal product mix when resources are constrained
5. determine the value of purchasing more of a constrained resource
Add or drop a product: summary
relevant benefits and costs:
1. contribution margin
2. avoidable fixed costs
3. direct opportunity costs (benefits from the firm is giving up by keeping the product line)
Not relevant:
1. shared and sunk costs (often allocated to product lines or business
Make or Buy: Summary
relevant benefits and costs:
1. savings from direct labor, direct material, variable overhead
2.savings from direct and avoidable fixed costs
3. cost of buying from outside supplier
irrelevant:
1. unavoidable shared costs, sunk costs
other things to consi
Accept a special offer: summary
relevant benefits and costs:
1. variable incremental costs (direct materials, direct labor, variable overhead, variable marketing cost)
(some of these may not be relevant for every decision)
2. offer price
3. any other direct costs of servicing the order
determine the most profitable use of a constrained resource
step 1: determine the most efficient use of the constrained resource. the key is to compare the contribution margin per unit of the constrained resource.
2. create a profit-maximizing production plan
managing constraints
is it often possible to increase the capacity of a constrained resource. if a bank has only one loan officer and she can't keep up with the loans, they could...
1. have other workers dose of the paperwork that she is currently doing so she can focus on lo
Utilization of a Constrained Resource
relevant information:
1. each products contribution margin per unit of the constrained resource
2. value of a constrained resource
you will buy more of the resource if the cost of the resource is less than the contribution margin you are losing by not hav
Contribution margin
selling price per unit - variable cost per unit