GROUP 6 REPORT

DECISIONS INVOLVING ALTERNATIVE CHOICES:

ELIMINATE OR CONTINUE PRODUCT LINE

SCRAP OR REWORK
KEEP OR REPLACE
ELIMINATE OR CONTINUE
PRODUCT LINE
 ELIMINATE OR CONTINUE PRODUCT LINE

Some product lines or business segments tend to under-perform compared to others. When
deciding to add a new product line or drop an existing one, the management must consider
relevant benefits and costs.
Decisions require the computation of segment income.
Segment income excludes allocated fixed costs, since these are not traceable to the segment
and are unavoidable. The entire business will still incur them regardless.
If the product line or segment has a positive segment margin, it is recommended to keep (or
add, if new) that segment.
 THING NEEDS TO CONSIDER:

1. DOES THE SEGMENT HAVE A POSITIVE

CONTRIBUTION MARGIN?

2. CAN ANY OF THE FIXED COSTS BE AVOIDED

IF THE SEGMENT IS DISCONTINUED?

3.CAN THE FREED UP CAPACITY BE USED FOR

ANOTHER PURPOSE?

4. WILL DISCONTINUING A SEGMENT HAVE

ADVERSE EFFECTS ON SALE OF OTHER
PRODUCTS?
 TWO TYPES OF FIXED COST

Direct Fixed Costs are fixed costs that can be directly traced to the segment. Just
because a fixed cost is direct does not mean that it is avoidable. There may be
depreciation, contractual obligations, and other costs that the company will not be able
to cut even if the segment is discontinued. If the fixed costs cannot be avoided, losses
will increase if the segment is discontinued because the segment will no longer be
contributing to the total contribution margin.
Common Fixed Costs are organization sustaining fixed costs that are allocated to the
segment. These fixed costs will continue even if the segment has been eliminated; they
will just be allocated to the remaining segments
 EXAMPLE
XYZ COMPANY HAS THREE PRODUCT LINES. THE COMPANY IS
CONSIDERING DROPPING PRODUCT 2 BECAUSE IT HAS BEEN
OPERATING AT A LOSS. THE FOLLOWING SUMMARIZES THE
INCOME OF THE THREE PRODUCT LINES.
2000
 CONCLUSION

The allocated fixed costs are unavoidable costs. The entire $9,500
would be incurred with or without Product 2. If Product 2 is dropped,
it will result in lower overall net income. Hence, the product line
should not be ELIMINATED.
SCRAP OR REWORK
DECISION
 SCRAP
• Is a material left over when making a product. It has low sales
value when compared with the sales value of the product or
sales of value of the input material.

• Scrap is a residual material that results from manufacturing a

product. It is added into production but is not part of a
finished product
 REWORK
• Rework is units of production that do not meet the
specifications required by customers but that are subsequently
repaired and sold as good finished units.

• Rework is done on finished products or components, that did

not meet specifications and after rework they become
acceptable finished goods of components.
 SCRAP OR REWORK
• Often in manufacturing processes, there are products that do not pass
inspection. Companies can either sell them as is, or rework them to improve
the quality.
• A company must decide between scrapping or reworking units that do not
pass inspection
• Loss opportunity cost of not making new units must also be considered.
• The decision to scrap or rework an item depends on its incremental benefits
 SCRAP OR REWORK
• If the reworked units yield a greater benefit than selling them as
scrap, then the decision to rework can be considered.
• As long as rework costs are recovered through sale of the
product, and rework does not interfere with normal production,
we should rework rather than scrap
 PLANS TO REDUCE SCRAP AND REWORK

1. Improving Communication- Every step of the process must be

available for view by everyone involved in the process.

2. Organizing the System for Documentation-Your software solution

should have a way to store every spec, blueprint, work order, and
change order for every piece being manufactured.
3. Improving Change Management- Many errors can be traced back to
a poorly executed change management process. The right quality
management system (QMS),will keep everything up to date in real
time.

4. Optimizing the Manufacturing Processes-Optimizing the

manufacturing process means putting in place a process that recognizes
problems so you can take corrective action.

5. Implementing End-to-End Quality Assurance- The main objective is

to identify and eliminate the root cause of quality defects.
KEEP OR REPLACE
 KEEP

• Keeping track of your construction equipement and keeping it up

to standard ,although it can seem daunting and time-consuming ,
it is essential to reaching its full lifetime potential as well as
saving you time and money and helping to keeep tha machine
operators safe .
 REPLACE

• To replace is to substitute one thing for another — in this case, to get a new
machine and dispose the old one . When you see the word place it means to
replace a new .
• If you replace something that is broken, damaged, or lost, you must get a new one
to use instead .
• In replacement, one is concerned with equipment and machinery that
deteriorates with the passage of time. Since over time, an equipment ages, every
piece of equipment in an industry is a candidate for replacement. However, with
increasing maintenance, the productive life of an equipment can be increased but
the maintenance cost goes high.
When equipment breaks down, everything from your productivity to your bottom line is disrupted.
Your team needs a quick and effective solution. The difficult question arises- should you try for a repair,
or replace the asset outright?
Replacing equipment is the larger investment, so many technicians choose to repair the equipment
instead of replacing it. But the costs that go along with frequent breakdowns — lower productivity,
defective output, rising labor costs, and unmet production schedules — can sometimes be greater than
the cost of replacing the equipment outright.
Leaving your decisions to guesswork can be a costly and dangerous approach. If you aren’t using a
computerized maintenance management system (CMMS) effectively, you’ll be forced to make decisions
reactively, and as soon as something breaks down, you’ll need to make a quick decision on what to do.
With productivity plummeting, your decision will likely be made from an emotional standpoint, rather
than solid data to support your decision.
Data Driven Decisions
Without a plan in place, your only concern will be getting your production back online as
quickly as possible. The reactive decision you’re forced to make may work out, but you
may also end up making a hasty decision that solves the problem in the short-term but
isn’t the best solution in the long run.
In addition to the obvious replacement cost for a new piece of equipment,
there are several other factors to take into consideration when deciding
whether to repair or replace a piece of equipment:
1. Analyze the Costs
2. Consider the Age of Equipment
3. Consider the Cost of Repairs
4. Consider Downtime
5. Consider Safety
6. Consider Efficiency
 Reasons for Replacement of Equipments:

Equipment are generally considered for replacement for the following reasons
:
Deterioration - it is the decline in performance of an equipment as
compared to a new equipment identical to the present one.

Obsolescence - technology is progressing rapidly; newer and better

equipment are being developed and turned out every year.
Inadequacy - when an existing equipment becomes inadequate
to meet the challenge of making new products or existing product
in large quantities, the question of replacement arises. An existing
pit furnace may be melting gray cast iron till present in a foundry,
but huge orders necessitate its replacement by a cupola.

Working conditions - It may be thought of replacing old

equipment and machinery which create unpleasant and
hazardous working conditions causing worker un-safety and
leading to accidents.
 • For example :
• Scout Corporation uses an older machine in its main production line. Given
its age, the machine creates some inefficiencies. For example, it requires
frequent maintenance. It has a significant amount of down time and
perhaps, there's higher labor costs associated with using this machine.
Managers are deciding whether to replace the machine with a new one.
• OLD NEW
• Original purchase cost $ 110, 000 $ 120, 000
• Accumulated Depreciatiom 70, 000 ---
• Estimated life 4 years 4 years
Further , the new machine will provide annual cost savings of $ 35, 000 . The
old machine can be sold for $ 5, 000 .

• If used for thier entire lives , the machine will zero value.

Cost savings ( 35 , 000 x 4 ) $ 140, 000

Cost of new machine ( 120, 000 )
Sale of the old machine 5, 000
Total $ 25, 000
• Managers have identified an investment opportunity not related to machinery
and equipment. An investment can be made only if the new machine is not
purchased. That is the investment is made with the cash used to purchase the new
machine.

• What percentage return does this alternative investment need to lead the manager
to retain the old equipment?
• $ 25 , 000
• ---------- = 20 . 83 %
• $ 120, 000
In this example, this additional information signaled the
potential for there to be an opportunity cost. A next best
alternative associated with the $120,000 and depending on
how much it returned, it actually might be our best
alternative.
END
GROUP 6 REPORTERS
Daisy Mae Prado - Leader
Members:
Kresha Bernabe
Zyra Mae Dequina
Charlene De Pedro
Meldy Anne Santillan
Rosaly Alibo

BSMA 3C