Exam 11: Relevant Costs for Decision Making

Relationships with resource suppliers should be analysed in constrained resource decisions.

There are no opportunity costs in keep or drop decisions.

If financial statement data are used to evaluate a decision to discontinue a business:

If relevant, opportunity costs should be considered in:

The effect of production practices on the customer quality is an example of a qualitative factor to be considered in a non-routine operating decision.

Kintectics Ltd can manufacture 480,000 electrical pumps a year at a variable cost of $15 per pump and fixed costs of $500,000. Kintectics Ltd budgeted that it can sell 400,000 at $25 each. An additional order of 100,000 was received, but at a discount of 35% from the regular price. The relevant cost to Kintectics Ltd of the special order is:

The timeliness of information can affect decision quality in non-routine operating decisions.

Managers may choose to outsource activities or products unrelated to their core organisational competencies.

Potential cost savings are not relevant in make or buy decisions.

By-products exist because the entity is producing the main products.

Quantitative analysis includes:

Allzine Ltd. currently buys 19,000 subcomponents from an outside supplier at $15 each. The company has excess capacity, which it sublets to another company for $50,000 per year. If the company were to use the idle capacity to produce the subcomponent internally, it would incur variable production costs of $12 per unit, and it would hire a new supervisor for $30,000 per year. Other fixed overhead costs would not change, but the average overhead cost per subcomponent unit would be $2. What is the advantage or disadvantage (in dollars) if Allzine makes the subcomponent instead of continuing to buy outside and subletting the excess capacity?

Decisions which have a short time horizon typically have less uncertainties than decision that have a longer impact.

The purpose of strategic decisions is to enhance the organisations' competitive advantage.

Differential analysis focuses on the full effect of the decision on the statement of profit or loss.

An opportunity cost is the benefit foregone when one alternative is chosen over the next best alternative.

Familija Consulting has its own legal department with the following annual costs: Labour $400,000 Administrative Costs $200,000 Overhead $200,000 The managers would like to outsource the legal function because it is not considered a core competency. The overhead is 60% fixed. Of the fixed overhead, $60,000 is the salary of the legal department director. The remaining overhead is an allocation of overhead costs for the entire consulting firm. The department director would still oversee the legal activities and coordinate all of the activities for the organisation with the external lawyer. The maximum amount that Familija is willing to pay an outside firm to replace the legal services is:

Sometimes qualitative factors are more important that maximising short term profitability.

An example of a non-routine operating decisions is whether to sell or process further.

Physical output method is a way to allocate joint costs to products.