Information and The Decision Process
The Concept of Relevance
Insourcing-Versus-Outsourcing and Make-or-Buy Decisions
Product-Mix Decisions with Capacity Constraints
100
A formal method of making a choice that often involves both quantitative and qualitative analyses.
Decision Model
100
Relevant Cost are
Expected Future Cost
100
Purchasing goods and services from outside vendors
Outsourcing
100
The decisions managers make about which products to sell and in what quantities
Product-Mix Decisions
200
Outcomes measured in numerical terms
Quantitative
200
The question is always
“What difference will a particular action make?”
200
Decisions about whether a producer of goods or services will insource or outsource are called
Make-or-Buy Decisions
200
What is the key factor that determines Product-Mix Decisions
Contribution Margin/unit
300
Managers use The ___________ to make decisions
Five-Step Decision-Making Process
300
Past Cost are also called
Sunk Costs
300
Contribution to operating income that is forgone by not using a limited resource in its next-best alternative use
Opportunity Costs
300
Rainier's landscaping has equipment with capacity of 10,000 hours. It currently anticipates getting orders that would utilize 9,000 hours of equipment time. Rainier charges $80 per hour for landscaping work.
What is Rainier's Corporation Contribution Margin per hour of anticipated equipment time?
$26
(Revenues)$720,000-(Variable Landscaping Costs)$450,000-(Variable Marketing Costs)$36,000=$234,000 Contribution Margin
$234,000/9,000 hours = $26 CM/hour
400
Outcomes that are difficult to measure accurately in numerical terms
Qualitative Factors
400
True/False - Fixed Manufacturing Cost before full capacity are not affected by a One-Time-Only Special-Order
True
400
Paco Corp would like to make 10,000 units.
Paco Corp's Direct Material's are $14/unit, Direct Materials Labor is $5/unit, Variable Manufacturing Overhead is $2/unit, Fixed Manufacturing Overhead is $3/unit.
Technology Corp offered to sell Paco Corp the same units for $205,000 with no avoidable costs
Should Paco Corp Make or Buy?
Paco Corp Should Buy
Paco Corp Total Relevant Cost= ($14+$5+$2)*10,000=$210,000
(Paco) $210,000-(Technology)$205,000=$5,000 relevant costs difference
400
Rainier's landscaping has equipment with capacity of 10,000 hours. It currently anticipates getting orders that would utilize 9,000 hours of equipment time. Rainier charges $80 per hour for landscaping work.
Hudson Corporation wants Rainier to do 4,000 hours at $70 per hour. Variable servicing costs for the Hudson Corporation order are $45 per hour and variable marketing costs are 5% of revenues. What is Rainier's contribution margin per hour of equipment time for Hudson's Corporation landscaping work?
$21.50
(Revenues)$280,000-(Variable Landscaping Costs)$180,000-(Variable Marketing Costs)$14,000=$86,000 Contribution Margin
$86,000/4,000hrs=$21.50/hr of equipment time
500
True/False - Quantitative Factors are solely financial in nature
False
500
Based on the information below, should the company preform the One-Time-Only Special-Order?
Yes, because of the $17,500 increase in Operating Income
500
Igor Corp would like to make 10,000 units.
Igor's Corp's Direct Material's are $12/unit, Direct Materials Labor is $5/unit, Variable Manufacturing Overhead is $2/unit, Fixed Manufacturing Overhead is $2/unit.
MC Corp offered to sell Igor Corp the same units for $220,000 with no avoidable costs
Should Igor Corp Make or Buy?
Igor Corp Should continue to make the units
Igor Corp Total Relevant Cost= ($12+$5+$2)*10,000=$190,000
(Igor) $190,000-(MC)$220,000=$30,000 relevant cost difference
500
Rainier's landscaping has equipment with capacity of 10,000 hours. It currently anticipates getting orders that would utilize 9,000 hours of equipment time. Rainier charges $80 per hour for landscaping work.
Hudson Corporation wants Rainier to do 4,000 hours at $70 per hour. Variable servicing costs for the Hudson Corporation order are $45 per hour and variable marketing costs are 5% of revenues. What should Rainier's Product-Mix Decision be?
$255,500
Existing Customers=9,000hrsx$26 Selling Price=$234,000
Hudson Corp=1,000hrsx$21.50 Selling Price=$21,500
Product Mix=$234,000-$21,500=$255,500