Week 4 Chapter 3 - Short-Term Managerial Decisions
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What is the definition for Relevant Quantitative Financial Information?
Future revenues/costs that differ between/among decision alternatives.
What are different specifications for Relevant Costs?
- Differential costs
- Avoidable costs
- Out-of-pocket costs + Opportunity costs
Why are Sunk Costs irrelevant to decision making?
- They cannot be changed by any current action.
- Costs of resources already committed.
When considering the purchase of a new grinding machine, what costs could be considered Sunk Costs?
- Original cost of old grinding machine
- Accumulated depreciation of old grinding machine
What are examples of relevant costs when purchasing a new machine?
- Acquisition cost of the new machine
- Current salvage value of the old machine.
- Annual operating costs of the new machine
- Estimated salvage value at the end of five years.
What are examples of relevant costs when considering overhauling an old machine?
- Cost of overhauling the machine.
- Annual operating costs.
- Estimated salvage value after 5 years.
When replacing an old machine with a new one, how do you calculate Net acquisition cost(NAC)?
NAC = Cost of new machine - Current salvage value of old machine
How might you calculate Total Relevant Costs for the replacement of an old machine?
NAC = Net acqusition cost
s = Estimated salvage value
oc = 5-year total operating cost
RC = Total relevant costs
RC = NAC - s + oc
What costs are typically unavoidable by outsourcing?
- Fixed overhead costs
- i.e. facility-sustaining or capacity-related costs
What are relevant factors when making an outsourcing decision?
- Supplier's ability to live up to expected quality and delivery standards
- Increasing prices of the supplier
- Need to maintain proprietary secrets
- Opportunity costs associated with existing capacity
- Transaction costs associated with outside supplier
What are Special "one-shot" Sales Orders?
A rare opportunity to sell a product to a different customer, at a different price, or in a different quantity.
What are Asset-Replacement Decisions?
- Decisions to replace assets.
- i.e. purchasing a new machine to replace an old one.
What are some common Short-Term decisions?
- Make-or-Buy (i.e., Sourcing) Decisions
- Special ("one-shot") Sales Orders
- Short-term Product-Mix Decisions
- Asset-Replacement Decisions
- Dropping a Product Line/Segment
Why is it unhelpful to display costs in terms of behavior for Short-Term Decision Making?
Because organizing costs by behavior tells us nothing about whether the costs are avoidable or unavoidable.
How do you calculate Incremental Costs for the purpose of Short-Term Decision Making?
Incremental costs = "out-of-pocket costs" + "opportunity costs"
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