0 chapter 9 relevant costs and product planning decisions © 2009 cengage learning
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CHAPTER 9
Relevant Costs and Product Planning Decisions
© 2009 Cengage Learning
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Introduction
How does a manager decide:
•The selling price of a product?
•Whether to accept a special order?
•Whether to add or drop a product?
•Which products to put on the shelves?
•Whether to hire an employee or outsource?
•Whether to make or buy a product?
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Special Orders
Special order decisions are
•Short-run pricing decisions
•Affected by
•Excess production capacity
•Relevant costs associated with each specific special order
•Qualitative factors
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Special Orders
Should Sunset provide 150 seats (for corporate executives attending a
convention in San Diego) for $125 instead
of the normal fare of $275?
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Special Orders
What information do we have?•Full cost per passenger is $137.61•BUT… what costs are relevant to this decision?•Consider only variable costs not fixed costs.•Variable costs are only the cost of meals ($6.50).•NEXT… consider capacity, do they have excess seats?•THEN… consider qualitative factors•AND… make decision.
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Special Orders
The price of a special order must be higher than
the additional variable costs incurred in
accepting the special order plus any opportunity
costs incurred.
Key Concept
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Outsourcing and Other Make-or-Buy Decisions
•Outsourcing is using another company to provide labor or produce a component rather than using
company employees•For example contracting with another company to provide janitorial and repair services instead
of using employees of the company
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Factors Affecting Outsourcing Decisions
•Impact of taxes
•Payment of fringe benefits to salaried employees
•Impact on the attitude of the remaining work force
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Vertical Integration
Vertical Integration Accomplished when a company is involved in multiple steps of the value chain.
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Make-or-Buy Decision
•Birdie Maker currently makes all golf clubs in the set but is considering acquiring the putter from Ace Putters, a manufacturer of custom putters
Cost to make: $26.50Cost to buy: $34.50
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The Make-or-Buy Decision
Based on Information Given:
Continue making putters IF they believe they can manufacture a putter of acceptable quality and
keep up with technological changes.
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Make-or-Buy with Relevant Fixed Costs
With Relevant Fixed Costs
Due to a change in fixed costs (leased equipment being returned)
Cost to make: $26.50
Cost to buy: $29.00
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Make-or-Buy with Relevant Fixed Costs
With Relevant Fixed Costs
Make internally considering:
•Quality of the putter
•Changing technology
•Dependability of the supplier
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Make-or-Buy with Relevant Opportunity
Costs
With Relevant Opportunity Costs
Opportunity CostsRent out the factory space now being used to make the putters, adding $10 opportunity costs per
putter
Cost to make: $36.50Cost to buy: $24.50
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Make-or-Buy With Relevant Opportunity
Costs
With Relevant Opportunity Costs
Buy the putter
Considering qualitative factors
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Make-or-Buy Decisions
A product should continue to be made internally and labor
incurred internally if the avoidable costs are less than the additional costs that will
be incurred by buying or outsourcing.
Key Concept
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The Decision to Drop a Product or a
Service
•One of the most difficult decisions a manager can make
•Must analyze relevant costs
•Must also consider qualitative factors
•Must consider contribution margin
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The Decision to Drop a Product or a
Service
A product should be dropped when the fixed
costs avoided are greater than the
contribution margin lost.
Key Concept
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Resource Utilization Decisions
Constraint: The capacity to manufacture a product or provide a service is limited in some manner.•Examples include skilled craftspeople, special machinery, and limited space often times are short-run constraints.
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Resource Utilization Decisions
Resource utilization decisions hinge on an
analysis of the contribution margin
earned per unit of the limited resource.
Key Concept
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Theory of Constraints
Identifies bottlenecks in the production process.
Bottlenecks limit throughput: the number of finished goods that result
from the production process.
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Decision to Sell or Process Further
A Furniture Manufacturer Can Sell its Furniture:
•Unassembled and Unfinished
•Assembled and Unfinished
•Assembled and Finished
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Decision to Sell or Process Further
A product should be processed further if the
additional revenue is greater than the additional cost.
Key Concept
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ABC and Relevant-Cost Analysis
•Uses multiple cost drivers to trace costs directly to products
•Focuses on changes in costs associated with a variety of different activities
•Helps managers identify what costs are really avoidable in a relevant-cost analysis