Chapter_12

Chapter_12 - Production and Inventory Management Production...

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1 Production and Inventory Management Production and Inventory Management Understand Cost Relationships Economic efficiency (profits) Understanding of relationships helps managers managers Effective production decisions Managers are Better Able to Meet Financial Objectives Management Information Systems MIS provides 1. Accurate and timely production Cost information All phases of business 2. Data in proper form needed 3. Accounting information that allow accurate and quick development of business financial documents 4. Efficiently and effectively monitoring and controlling business production costs
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2 Cost Concepts Cost: Acquire good or service Opportunity cost: Return (measured by highest value) Implicit cost: Do not include cash payments Included in calculation of total cost of product Explicit cost: Those costs which are generally for direct purchases of inputs and services which are directly traceable Cost Concepts Controllable and Uncontrollable Costs Incremental, Avoidable, and Sunk Costs Total Cost = Total Fixed + Total Variable Costs Costs Total Fixed Cost (TFC) Total Variable Cost (TVC) Total Cost (TC) FIXED KEY: DO NOT VARY WITH SALES “SUNK COSTS” COST OF OPENING DOOR FOR BUSINESS Fixed Cost Total fixed costs $ Volume F.C. per unit Attempt to AFC A.F.C. Sales TFC
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3 VARIABLE KEY: VARY DIRECTLY WITH SALES SELLING CAUSES V.C. $ Cost T.V.C. Volume A.V.C. (Average Variable Cost) V.C. per unit Sales = Volume The Costs of Production Cost Analysis What sales volume ($ or units) needed to cover all costs? Volume necessary to reach profit goals Effect on profit of changes in: Costs Fixed & Variable Selling Price
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4 How to Use Each Sales Dollar? To cover variable cost Tf i d To cover fixed cost •P r o f i t Contribution Concept Selling Price/Unit = Total Cost/Unit + Profit/Unit Total Cost/Unit = Variable Cost/Unit + Fixed Cost/Unit Selling Price/Unit – Variable Cost/Unit = Fixed Cost/Unit + Profit/Unit Contribution = Selling Price/Unit minus Variable Cost/Unit The Contribution Concept Selling Price/Unit = $125 100% Minus: Variable Cost/unit = -$75 - 60% Contribution to Fixed Costs = $ 50 40% and Profit/Unit We can use this information to make pricing decisions
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5 Applying the Contribution Concept Establish Selling Price of New Product If contribution/unit is typically 40% of selling price/unit, the proper selling price/unit for a new product would be: Total Variable Costs Per Unit = [1- Contribution Margin Percentage] * [Selling Price Per Unit] $120 = [1 – 0.40] * Selling price per bag $200 = Selling price per Bag Shutdown Point Short Run vs Long Run Pricing Short run Firm with idle capacity can take job where price does not cover all total cost Contribution is positive (P AVC > 0) Contribution is positive (P- AVC > 0).
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This note was uploaded on 12/11/2008 for the course ECON 2010 taught by Professor Roussel during the Spring '08 term at LSU.

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Chapter_12 - Production and Inventory Management Production...

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