John Deere Summary Note - EWMBA 201a Fall 2007-Prof....

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EWMBA 201a Fall 2007—Prof. Wolfram John Deere Components Works: Summary These notes summarize the main points that you should take away from the John Deere Component Works case that we discussed in class. At a very general level, the point of the case was to reinforce the idea that you should not make economic decisions on the basis of accounting costs, continuing the theme that we started with the discussion of opportunity costs and sunk costs. There are several more specific lessons that you should take away, including: 1. Don’t allocate overhead when making pricing decisions. Overhead should only be taken into account when you're making the decision that causes you to incur the overhead. For example, if you're debating whether or not to keep an existing plant open, you should think about all the costs that you would save by closing it down, including the resale value of the machines, the workers you wouldn't be paying (minus any severance payments), etc. If you've got an existing plant and are deciding which product lines to produce, you want to ignore any costs that you're already paying to keep the plant open, and think just about the new costs you
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John Deere Summary Note - EWMBA 201a Fall 2007-Prof....

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