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31 Cards in this Set
- Front
- Back
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What to do if there is excess
capacity in "Special Sales Order" ? |
Is there excess
capacity? 1. Yes - Consider Further 2. No - Reject the special order |
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Does reduced price cover variable costs in SPecial Sales Order ?
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Does reduced price cover variable costs ?
1. Yes - Consider fixed Costs 2. No - Reject the special order |
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5 step process to how managers make decisions
(D, I, G, C, C) |
1. Define business goals
2. Identify alternative courses of action 3. Gather and analyze relevant information 4. Compare alternatives 5. Choose best alternatives |
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3 facts concerning relevant information
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Relevant costs
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◦ Relevant to a particular decision
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2 facts concerning irrelevant costs
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Sunk costs
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◦ Occurred in the past
◦ Cannot be changed |
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3 qualitative factors managers need to consider in decision making
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◦ Impact on employee morale
◦ Impact on quality ◦ Customer relations |
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2 facts concerning relevant non financial information
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1. Managers need to consider qualitative factors in
decision-making 2. Use same guidelines as relevant costs |
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Incremental analysis
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◦ How operating income differs under each alternative
◦ Irrelevant information is ignored |
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Two keys to the relevant information approach
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◦ Focus on relevant revenues, costs and profits
◦ Use a contribution margin approach |
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3 Questions to ask when setting a regular price
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1. What is our target profit?
2 How much will customers pay? 3. Are we a price-taker or a price-setter? |
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3 facts about Price Takers
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1. Product lacks uniqueness.
2. Intense competition 3. Pricing approach empasizes target pricing. |
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3 Facts about Price Setters
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1. Product is more unique.
2. Less competition 3. Pricing aproach emphasizes cost plus pricing |
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Cost Plus Pricing (Formula)
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Full Cost plus (+)
Desired profit = Cost Plus Pricing |
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Target Pricing
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Revenue at market price
(-) Desired Profit = Target Full Price |
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If company is a price-taker for the product?
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Emphasize target
pricing approach |
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If company is a price-setting for the product?
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Emphasize costplus
pricing approach |
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5 questions to ask when dropping departments, products, or territories.
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1. Does the product provide a positive contribution margin?
2. Will fixed costs continue? 3. Can any fixed costs be avoided if we drop the product? 4. Will the sales of other products be affected? 5. What could we do with the freed capacity? |
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4 reasons to drop a product
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DECISION RULE: Drop a product, department, or territory?
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If lost revenues are >cost savings? Dont drop
If Are lost revenues < cost savings? Drop |
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4 products production constraints
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3 questions to ask when considering the product mix
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1. What constraints stop us from making all the units we can sell?
2. Which products offer the highest contribution margin of the constraint? 3. Would emphasizing one product over another affect fixed costs? |
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Which product to
emphasize? |
The product with the highest contribution margin per unit of
constraint. |
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3 questions about outsourcing
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1. How do variable costs compare to the outsourcing
costs? 2. Are any fixed costs avoidable if we outsource? 3. What would we do with the freed capacity? |
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Should the company outsource? If the incremental costs of making exceed incremental costs to outsource
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Outsource
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Should the company outsource? If the incremental costs of making are less than the incremental costs to outsource
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Do not
outsource |
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Opportunity Cost
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The benefit forgone by not choosing an alternative
course of action |
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3 Questions to ask when determining whether to sell as is or process further
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1. How much revenue will be
earned if sold “as is”? 2. How much revenue will be earned if processed further? 3. How much will it cost to process further? |
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Sell as is or
process further? If the revenue from processing further exceeds extra costs |
Process Further
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Sell as is or
process further? If the revenue from processing further is less than extra costs |
Sell as is
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