ch04 - Chapter 4 Relevant Costs for Nonroutine Operating...

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Chapter 4 Relevant Costs for Nonroutine Operating Decisions LEARNING OBJECTIVES Chapter 4 addresses the following questions: Q1 What is the process for making nonroutine operating decisions? Q2 How are decisions made to accept, reject, and price special orders? Q3 How are decisions made to keep or drop products, segments, or whole businesses? Q4 How are decisions made to insource or outsource an activity (make or buy)? Q5 How are decisions made for product emphasis and constrained resources? Q6 What qualitative factors are important to nonroutine operating decisions? Q7 What limitations and uncertainties should be considered when making nonroutine operating decisions? These learning questions (Q1 through Q7) are cross-referenced in the textbook to individual exercises and problems. COMPLEXITY SYMBOLS The textbook uses a coding system to identify the complexity of individual requirements in the exercises and problems. Questions Having a Single Correct Answer: No Symbol This question requires students to recall or apply knowledge as shown in the textbook. e This question requires students to extend knowledge beyond the applications shown in the textbook. Open-ended questions are coded according to the skills described in Steps for Better Thinking (Exhibit 1.10): Step 1 skills (Identifying) Step 2 skills (Exploring) Step 3 skills (Prioritizing) Step 4 skills (Envisioning)
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4-2 Cost Management QUESTIONS 4.1 Future costs are relevant only if they differ between the decision alternatives. 4.2 The magazine companies would want to cover their variable costs, but beyond that they are assuming they can gain readership by letting students subscribe at a discount. Then when the students graduate, they will continue to subscribe at the full rate, increasing the organization’s profits and readership. The magazines also earn higher advertising fees with higher readership, so they receive additional revenue from student subscriptions. In addition, it is unlikely that many students would subscribe without the discounts, so the companies are not replacing their regular business. 4.3 If variable cost*40% is greater than or equal to the contribution margin on products for which capacity is currently used, take the special order. If the contribution margin on current products is higher, do not take the special order. 4.4 Yes, it applies. The decision rule is to accept a special order as long as it covers at least the variable costs if it does not replace regular business. It is usually presumed that the audience that is attracted to afternoon shows is different from the audience that is attracted to regular times. The pricing decision has to do with the fact that most costs are fixed, rather than variable. Weekend internet specials for the airlines are similar. Hotels and restaurants in resort areas often reduce prices during the off-season. 4.5
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ch04 - Chapter 4 Relevant Costs for Nonroutine Operating...

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