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Relevant Informationand Decision Making:Production Decisions

9

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Opportunity Costs

Opportunity Cost• The maximum available contribution to profit

foregone by using limited resources for a particular purpose

• Not a cost in the normal sense of the word

• Consider the choice between staying with your current job or returning to school; if you quit your job to return to school the wages which you would have earned had you stayed in the job are an opportunity cost of returning to school

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Differential Costs

Differential Analysis• Differences in revenues and costs between two

alternatives

• Also called incremental analysis

Remain Open AnAs An Independent

Employee Practice Difference

Revenues $60,000 $200,000 $140,000Outlay costs 0 120,000 120,000

Income effect per year $60,000 $80,000 $ 20,000

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Make or Buy Decision

• decision to manufacture the product or subcontract to an independent supplier (outsource)

Make Buy

Relevant costs:

Direct material $20,000

Direct labour 80,000

Variable overhead 40,000

Fixed overhead 20,000

Cost to buy $200,000

Total cost $160,000 $200,000

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Make, Buy, Rent?

• If the company buys the parts, the facility will be idle. Other options include renting out the facilities ($35k) or manufacturing another product generating revenue ($55)

• Identify the best scenario

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Make, Buy, Rent??

Make Buy/Idle Buy/RentBuy/Other Product

Rent RevenueRevenue from other ProductsCost of obtaining parts Net relevant costs

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Joint and Separable Costs in Joint Production Processes

Split-Off Point• Point in manufacturing process where products separate

Joint Product Cost• A cost incurred in a production process prior to the split-off point

which cannot be identified with specific intermediate or final products except in an arbitrary manner

Separable Cost• A cost which related to a specific product (cost objective)

ChemicalX

$90,000

SeparableProcessing Cost

$40,000

ChemicalY

$30,000

ChemicalYA

$80,000

JointCost

$100,000

Split-OffPoint

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Sell or Process Further Decision

• decision, in a joint production process, to sell product at the split-off point or process further

Sell @ Split Process Further

Relevant revenue: $30,000 $80,000

Relevant costs:

Cost to processbeyond split-off point 40,000

Total cost $30,000 $40,000

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Group: In Class

• Problem 3• Problem 5

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Assignment

• Problem 11, 13, 15