ch-08-PPT

Chapter 8: Relevant Costs for Short-Term Decisions

8.1 Information Relevant to Short-Term Business Decisions

  • Managers usually gather and analyze relevant information for short-term business decisions through a structured process:

    • Define business goals and alternatives.

    • Identify relevant information (incremental costs, revenues).

    • Compare alternatives to choose the best action.

    • Implement the decision and follow-up with actual results against anticipated results.

8.2 Pricing Decisions

  • Types of Pricing Decisions:

    • Determine target profit and how much customers are willing to pay.

    • Establish if a company is a price-taker or price-setter.

    • Decision Rule:

      • Price-Taker: Use target costing approach.

      • Price-Setter: Emphasize cost-plus pricing approach.

    • Cost-Plus Pricing: Total cost + desired profit margin.

      • Example: Total cost analysis reveals total expenses and necessary pricing for profit.

8.3 Special Order Decisions

  • Special orders involve one-time pricing at reduced rates.

  • Considerations:

    • Assess excess capacity.

    • Ensure the price covers incremental costs.

    • Evaluate impacts on regular sales.

  • Decision Rule: Accept if revenue from the special order exceeds incremental costs.

8.4 Discontinuing Products, Departments, or Stores

  • Decision criteria include:

    • Contribution margin needs to be positive.

    • Identify any fixed costs that can be avoided upon discontinuation.

    • Evaluate impact on sales of other products.

  • Decision Rule: Discontinue if contribution margin loss exceeds avoidable fixed costs savings.

8.5 Resource Constraints in Product Mix Decisions

  • Determine which products have the highest contribution margin per limited resource.

  • Key questions:

    • What are the limiting factors?

    • Is there a profit impact on other products from changing the focus?

8.6 Outsourcing Decisions (Make-or-Buy)

  • Consider:

    • Comparison of variable costs of in-house production versus outsourcing costs.

    • Potential fixed costs savings.

  • Decision Rule: Outsource if incremental costs of making exceed those of outsourcing.

8.7 Processing Decisions

  • Evaluate revenue potential if an item is sold as-is versus further processed.

  • Decision Rule: Process further if the incremental revenue exceeds the additional processing costs.

8.8 Data Analytics Types

  • Types of Data Analytics:

    • Descriptive: What happened?

    • Diagnostic: Why did it happen?

    • Predictive: What might happen?

    • Prescriptive: What should be done?

8.9 Using Excel for Data Analysis

  • VLOOKUP can be utilized to extract relevant variable costs from datasets, aiding decision-making.

  • Basic steps include selecting target cell, using the VLOOKUP function, inputting necessary information, and copying results.