Chapter 12
Annual parking pass at Nova
Not relevant
Cost of NYC parking
Relevant
Cost of amtrak from Philly to NYC
Relevant
which decision to favor
emphasize the product with the highest contribution margin per unit of constrained resource
Restaurant bill
not relevant
cost of buying flowers
not relevant
Annual auto insurance
Sunk cost
Loved one makes $800,000/year
Not relevant
What is a constraint?
A constraint is anything that prevents you from getting more of what you want. The constraint, or bottleneck, in the system is determined by the step that limits total output because it has the smallest capacity.
How to analyze a make or buy decision?
If the incremental costs of making exceed the incremental costs of buying, then the company should buy it.
What is a joint cost?
Joint costs are all costs incurred up to the split-off point. Joint costs (the costs before split-off points) are irrelevant in decisions regarding whether to process further. (these costs should not be allocated to end products for decision making purposes
Outsource?
Outsource: if incremental costs of making exceed costs of outsourcing Dont: incremental costs are less than the costs of outsourcing
What is a sunk cost? What is an opportunity cost?
Two broad categories of costs are never relevant in any decision. They include: (1) Sunk costs (A sunk cost is a cost that has already been incurred and cannot be avoided regardless of what a manager decides to do.) For example, the purchase price of equipment is a sunk cost. (2) Future costs that do not differ between the alternatives. Hint: A fixed cost is not always an irrelevant cost. An opportunity cost is the benefit that is foregone as a result of pursuing some course of action. An opportunity cost is a relevant cost.
Decision Rule
comp should drop the line only if profit would increase comp will compare the contribution margin that would be lost to the costs that would be avoided if the line was dropped
How to analyze sell or process further decision?
For sell as is or process further decisions, if the incremental revenue from processing further exceeds the incremental cost of processing further, then the correct decision is to process further.
How to analyze dropping a product line decision?
A company should drop the product line only if avoidable cost savings are greater than the contribution margin lost.
Cost of gas goes up in NYC
Relevant
What are relevant costs?
Relevant costs are costs that differ between alternatives. When making the decision, the company should consider relevant costs. An avoidable cost is a cost that can be eliminated, in whole or in part, by choosing one alternative over another. Avoidable costs are relevant costs. Unavoidable costs are irrelevant costs. Relevant costs are also called differential costs, incremental costs, or avoidable costs.
How to analyze constrained resource decision?
The decision rule is to emphasize the product with the highest contribution margin per unit of constraint. Managers should pay great attention to bottleneck operations because they have limited capacity for producing output. In a plant operating at capacity, only some specific machines or processes are operating at the maximum rate possible.
