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Management's Decision Making Process
Information used for Decision Making Financial Information | Non-financial Information | Revenues | Effect on employee turnover | Costs | Environment | Profitability | Company's image |
Accept/Decline an order at a special priceCriteria: Accept if Contribution Margin is positive | Assumptions:
- Other products not affected by special price
- Other customers don't get special price | No change in fixed costs, only variable cost change |
Retain or replace equipmentCriteria: Replace if new asset increases net income | Book value: original cost of asset
Salvage Value: money earned when reselling asset
Useful Life: how long asset is expected to generate revenue |
Eliminate/Retain unprofitable business segmentCriteria: drop item if improves net income, retain segment unless FC > lost CM | Need to know if FC are
- Avoidable
- Unavoidable: must be allocated on remaining segments |
Allocate limited ressourcesCriteria: select product that maximizes net income | Short term decision: focus on product with greatest CM unit
Long term decision: can constraint be reduced/eliminated
- Change CM unit
- Remove limitations on ressources |
| | Incremental Analysis ApproachMaximize net income | Identify expenses that vary with decisions |
Key Cost ConceptsRelevant costs | Opportunity Costs | Sunk Costs | Cost in future | | Cost in past |
Make/buy components or finished productsCriteria: Outsource if cost saving is positive | Advantages:
- Frees up capacity for other use
- Shifts production risks to the supplier | Disadvantages:
- Potential loss of quality control
- Hard to move back insource |
Sell product or Process furtherCriteria: Process further until revenue < costs | Produce multiple product simultaneously from single raw material
- Some products can be sold as is
- Some products can be processed further
- Products identifiable from each other at split-off point |
Theory of ConstraintsUsed to identify and manage constraints to achieve goals | Requires identifying and constant attempts to reduce/eliminate constraint |
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