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Hho8e Ch19 Stud

Hho8e Ch19 Stud

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Published by: Thalia Sanders on Mar 14, 2012
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Chapter 19

Describe and identify information relevant to business decisions

Define business goals Identify alternative courses of action Gather and analyze relevant information Compare alternatives

Choose best alternative
Copyright (c) 2009 Prentice Hall. All rights reserved. 3


Expected future data Differs among alternatives Relevant costs

Copyright (c) 2009 Prentice Hall. All rights reserved.

4


Do not affect decision Sunk costs

Copyright (c) 2009 Prentice Hall. All rights reserved.

5

Managers need to consider qualitative factors in decision-making
Use same guidelines as relevant costs

Copyright (c) 2009 Prentice Hall. All rights reserved.

6

Incremental analysis

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7

Make special order and pricing decisions

Is there excess capacity?

Will the reduced price cover the incremental costs?

Will special order affect sales in the long-run?
Copyright (c) 2009 Prentice Hall. All rights reserved. 9

Is there excess capacity?

?

?

Consider further

Reject the special order

Does reduced price cover variable costs?

?

Consider fixed costs Reject the special order

?

Will regular customers find out and demand a lower price?

Will special order customer demand lower price on a regular basis? Will special order start a price war with competitors?
12

Expected increase in revenues Expected increase in variable costs Expected increase in operating income

50,000 packs x .37 50,000 packs x .32

$18,500 16,000 $ 2,500

ACCEPT

If $5,800 of costs will be incurred, then Active-Cardz should decline.

Copyright (c) 2009 Prentice Hall. All rights reserved.

13

What is our target profit?

How much will customers pay?

Are we a price-taker or a price-setter?
Copyright (c) 2009 Prentice Hall. All rights reserved. 14

 

Product lacks uniqueness Intense competition Pricing approach emphasizes target pricing

  

Product is more unique Less competition Pricing approach emphasizes cost-plus pricing

Price-takers

Price-setters
Copyright (c) 2009 Prentice Hall. All rights reserved. 15

Revenue at market price Less: Desired profit Equals Target full cost
Includes product and period costs

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16

Full cost Plus: Desired profit Equals Cost-plus price

Copyright (c) 2009 Prentice Hall. All rights reserved.

17

DECISION RULE: How to Approach Pricing?

Is company a price-taker for the product?

Is company a price-setter for the product?

?

?

Make dropping a product and product-mix decisions

Does the product provide a positive contribution margin?

Will fixed costs continue?

Can any fixed costs be avoided if we drop the product?

Will the sales of other products be affected?

What could we do with the freed capacity?

Copyright (c) 2009 Prentice Hall. All rights reserved.

20

Two keys
◦ Focus on relevant revenues, costs and profits ◦ Use a contribution margin approach

Focus now on a decrease in volume

Copyright (c) 2009 Prentice Hall. All rights reserved.

21


 

Product has a negative contribution margin Unavoidable fixed costs are irrelevant Avoidable, direct fixed costs are relevant

Copyright (c) 2009 Prentice Hall. All rights reserved.

22

DECISION RULE: Drop a product, department, or territory?
Are lost revenues > cost savings? Are lost revenues < cost savings?

?

?

Expected decrease in revenues Expected decrease in variable costs Expected decrease in operating income

$129,000 93,000 $36,000

What do you do?

24


Restrict production or sale of product Manufacturers
◦ Limitations on labor or machine hours or available materials

Merchandisers
◦ Amount of display space

Stiff competition may limit demand

Copyright (c) 2009 Prentice Hall. All rights reserved.

25

What constraints stop us from making all the units we can sell?

Which products offer the highest contribution margin of the constraint?

Would emphasizing one product over another affect fixed costs?
Copyright (c) 2009 Prentice Hall. All rights reserved. 26

DECISION RULE: Which product to emphasize?

?

Make outsourcing and sell “as is” or process further decisions

How do variable costs compare to the outsourcing costs?

Are any fixed costs avoidable if we outsource?

What would we do with the freed capacity?
Copyright (c) 2009 Prentice Hall. All rights reserved. 29

DECISION RULE: Should the company outsource?

If the incremental costs of making exceed incremental costs to outsource

If the incremental cost of making are less than the incremental costs to outsource

?

?

The benefit forgone by not choosing an alternative course of action

31

How much revenue will be earned if sold “as is”?

How much revenue will be earned if processed further?

How much will it cost to process further?

Copyright (c) 2009 Prentice Hall. All rights reserved.

32

DECISION RULE: Sell as is or process further?

If extra revenue from processing further exceeds extra cost

If extra revenue from processing further is less than extra cost

?

?

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