Decision Making and Relevant Information. Chapter 11. Overview. Decisions Relevant information Examples of common decisions Opportunity costs Capacity constraints Replace equipment Comprehensive example. Information and the Decision Process. A decision model is a formal method
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A decision model is a formal method
for making a choice, often involving
quantitative and qualitative analysis.
Choose an Alternative
Implement the Decision
costs and revenues in
Relevant costs and relevant revenues are
expected future costs and revenues that
differ among alternative courses of action.
Profit is made if the incremental revenue exceeds incremental costs.
If excess capacity exists, then relevant cost generally equals variable cost to make special order.
Will marketing costs change?
All variable costs
All fixed costs
Use same unit
costs at different
and services from
or providing services
within the organization.
This is a very common (frequent) decision made by most organizations.
Purchase managers report three important factors:
(2) Supplier dependability
In making a “make-or-buy” decision it is often times useful and quick to compare the cost to outsource versus the costs saved if you outsource.
Opportunity cost is the contribution to income
that is forgone (rejected) by not using a
limited resource in its next-best alternative use.
Generally, opportunity cost is the benefit foregone by not choosing the next best alternative.
Many decisions have an opportunity cost.
What is the opportunity cost for making the decision to come to class today?
Give an example of a decision that had no or zero opportunity cost.
products to produce when there
are capacity constraints.
Answer: Produce/sell product(s) with the highest CM/unit of constraint!
Per unit Product #2Product #3
Sales price $2.11 $14.50
Variable expenses 0.41 13.90
Contribution margin $1.70 $ 0.60
Contribution margin ratio 81% 4%
Bismark Co. has 3,000 machine-hours available.
One unit of Prod. #2 requires 7 machine-hours.
One unit of Prod. #3 requires 2 machine-hours.
What is the contribution of each product
Product #2: $1.70 ÷ 7 = $0.24
Product #3: $0.60 ÷ 2 = $0.30
Perspective, the book value
of equipment is irrelevant in
between the decision model
used by a manager and the
performance evaluation model
used to evaluate the manager.
What is the journal entry to sell the existing machine?
Accumulated Depreciation 50,000
Loss on Disposal 16,000
In the real world would the manager
replace the machine?
An important factor in replacement decisions
is the manager’s perceptions of whether the
decision model is consistent with how the
manager’s performance is judged.
Top management faces a challenge – that is,
making sure that the performance-evaluation
model of subordinate managers is consistent
with the decision model.