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    Mostafa Kagha
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    This document provides information on different types of analyses for operational decision making: 1) A differential analysis compares the differential revenues and costs between two alternatives, while an incremental analysis looks at the additional costs or benefits of a proposed alternative compared to the existing situation. 2) Relevant costs are future costs and benefits that differ among alternatives, while common fixed costs continue regardless of changes. Special fixed costs only apply to ongoing operations. 3) Decision types include make-or-buy, which compares total relevant costs of manufacturing a product versus purchasing it; add-or-delete, which evaluates products' contribution margins to determine if they should be kept or cut; and optimal mix, which prioritizes production based on

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    This document provides information on different types of analyses for operational decision making: 1) A differential analysis compares the differential revenues and costs between two alternatives, while an incremental analysis looks at the additional costs or benefits of a proposed alternative compared to the existing situation. 2) Relevant costs are future costs and benefits that differ among alternatives, while common fixed costs continue regardless of changes. Special fixed costs only apply to ongoing operations. 3) Decision types include make-or-buy, which compares total relevant costs of manufacturing a product versus purchasing it; add-or-delete, which evaluates products' contribution margins to determine if they should be kept or cut; and optimal mix, which prioritizes production based on

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    © All Rights Reserved
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    15 views4 pages

    Chapter 6

    Uploaded by

    Mostafa Kagha
    This document provides information on different types of analyses for operational decision making: 1) A differential analysis compares the differential revenues and costs between two alternatives, while an incremental analysis looks at the additional costs or benefits of a proposed alternative compared to the existing situation. 2) Relevant costs are future costs and benefits that differ among alternatives, while common fixed costs continue regardless of changes. Special fixed costs only apply to ongoing operations. 3) Decision types include make-or-buy, which compares total relevant costs of manufacturing a product versus purchasing it; add-or-delete, which evaluates products' contribution margins to determine if they should be kept or cut; and optimal mix, which prioritizes production based on

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Flag for inappropriate content
    of 4

    Relevant information for decision making with a focus

    on operational decisions
    • Differential cost is the difference in total cost between two alternatives.
    • Differential revenue is the difference in total revenue between two
    alternatives
    • A differential analysis is a decision process that compares differential
    revenues and costs of alternatives

    • Incremental costs are additional costs or reduced benefits generated by


    the proposed alternative
    • Incremental benefits are the additional revenues or reduced costs
    generated by the proposed alternative
    • Analyzing the differential costs between the existing situation and a
    proposed alternative is an incremental analysis
    • Relevant information is the predicted future costs and benefits that will
    differ among the alternatives
    • Special (avoidable or relevant or discretionary) fixed costs are costs
    that will not continue if an ongoing operation is changed or deleted
    • Common committed (unavoidable or irrelevant) fixed costs are costs
    that continue even if an operation is halted.
    Make or buy decision

    Item Make Buy


    Purchasing cost 0 XX

    + Direct material XX 0
    + Direct labor XX 0
    + Variable overhead XX 0
    + Special fixed cost (SFC) XX 0

    + Common committed fixed X X


    costs (CCFC)

    = Total costs

    Total relevant cost


    (Total costs – CCFC)
    Net relevant cost
    (Total relevant cost – proceeds)

    Notes:
    • Proceeds are inflows from using the idle space or capacity in case of
    buying the product. Proceeds are obtained from rental of the idle space or
    net income obtained from producing a new product or other plans the
    company has to utilize the idle space.
    • The make or buy decision is determined based on the lowest net relevant
    cost
    Add or delete decision

    Item Product 1 Product 2 Product 3 Total


    Sales
    - TVC
    = CM
    - SFC

    = CM after SFC

    Always constant
    regardless of any
    - CCFC change

    = Net income

    Notes
    • Products with negative CM after SFC are to be deleted due to their poor
    performance
    • Change of sales (SP x quantity sold) occurs due to change of SP or change
    of quantity sold, with all other factors remaining constant, a change in SP
    will change the CM of the product and a change in quantity sold will change
    the TVC of the product
    Optimal mix decision

    Item Product 1 Product 2 Product 3

    Maximum demand

    SP

    - UVC

    = UCM
    ÷ Standard processing
    time
    UCM/min
    or
    UCM/hour

    Notes
    • We prioritize production of products based on higher to lower CM/time
    unit as it indicates the profitability of each product.
    • Product mix is created due to limited resources of the company, if the
    company has sufficient capacity to produce all demand of each of its
    product, a product mix would be useless.

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