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Decision Making (CVP Analysis (Activity based CVP analysis (Break-even…
Decision Making
CVP Analysis
CVP analysis under conditions of uncertainty
CVP analysis in service and non-profit organisations
Activity based CVP analysis
Break-even point = (Fixed cost+(Setup cost x Number of setups) + (Engineering cost x Number of Engineering Hours))/ (Price - Unit variable cost)
CVP analysis in JIT environment
Total Cost = Fixed cost + ( Unit variable cost x Number of units) + ( Engineering cost x Number of engineering hours)
Short Term Decision Making
Considerations
Ethics_Guidelines of Ethical Conduct
Identify the consequences of the decision and its effect on others
Consider obligations and responsibilities to those that will be affected decision
Identify an ethical decision by using personal ethical standards of honesty and fairness
Make a decision that is ethical and fair to those affected by it
Decision Making Model
Identify costs, benefits
Total relevant costs and benefits
Identify alternatives
Asses non-financial factors
Define the problem
Make Decision
Non-Financial Considerations
Intangible assets
Competitor's movements
Intellectual property
Environmental factors
Corporate social responsibilty
Customer satisfaction
Employee satisfaction
Quality
Brand name
Application of CVP analysis and cost concepts
Minimum Pricing Decisions
= Incremental cost of manufacturing + opportunity costs (if any)
Keep or Drop Decisions
Incremental Cost Savings
Opportunity Cost
Incremental Revenue
Qualitative Factors
Sell or Further Process
Rules
Only the incremental costs and revenues of the further process are relevant
The joint process costs are irrelevant - they are already 'sunk' at the point of separation
Qualitative Factors
Special Order Decisions
If the company is operating at less than capacity, revenue of regular customers will not be affected
If the company is operating at capacity, it will have to give up some regular sales in order to provide the special order
Outsourcing Decisions
When to outsource?
If the concern feels that manufacturing internally will mean additional labour problem
If adequate managerial manpower in not available to take charge of the extra work of manufacturing
If the company does not have the requisite skilled manpower to make
6.If the component shows much seasonal demand resulting in a considerable risk of maintaining inventories
If the return on the necessary investment to be made to manufacture is not attractive enoug
If transport and other infrastructure facilities are adequately available
If it costs less than to manufacture it internally
If the process of making is confidential or patented
If there is a risk of technological obsolescence of the component such that it does not encourage capital investment in the component
Incremental cost analyis
Advantages
Reduce costs or
Benefits from supplier effeciencies
Product Mix Decision
Features
Choosing among alternatives
Often have long-run consequences
Referred to as tactical decisions
Immediate or limited time frame
Based on relevant costs
Small scale actions that serve a larger purpose