Int. Acc. MA LECT 5: CH 10 Relevant Info for decision making part 2: …
Int. Acc. MA LECT 5: CH 10 Relevant Info for decision making part 2:
Outsourcing vs. insourcing
is the process of purchasing goods and services from outside sellers rather than producing goods or providing services within the organisation, which is called insourcing.
Decisions about whether to outsource or produce within the organisation are often called
The most important factors in the make-or-buy decision are quality, reliability of supplies and costs.
Make-or buy-decisions slide 25-31/52
Describe the opportunity cost concept; explain why it is used in decision making
Because our time and money are limited, everything we buy or do prevents us from buying or doing something else.
If we take a year off to backpack across Europe, we lose the money we would have earned if we would have worked instead.
The cost incurred by doing one thing rather than another.
The benefit of a decision is not just the result, but the result relative to what else you could have done.
Opportunity cost of holding stock
opportunity cost of holding stock
: Profit forgone from tying up money in stock and not investing it elsewhere.
Carrying costs of stock can be a significant opportunity cost and should be incorporated into decisions regarding lot purchase sizes for materials.
Storage charges (rent, lighting, heating, refrigeration, air-
conditioning and others);
Warehouse manpower, equipment maintenance and running costs;
Interest on capital invested in the stocks;
Deterioration and obsolescence and
Describe the key concept in choosing which among multiple products to produce when there are capacity constraints
Decision criteria: Aim for the highest contribution margin per unit of the constraining factor.
The product with the highest contribution margin per unit of the constraining resource should be emphasized
Explain why the book value of equipment is irrelevant in equipment-replacement decisions
The book value of existing equipment is irrelevant since it is not a future cost.
The disposal price of old equipment and the purchase cost of new equipment are relevant costs.