Furthermore managers should consider nonfinancial

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Unformatted text preview: rchases the co mponent parts from outside plus the addit ional benefits o f using the resources freed up in the next best alternat ive use (opportunit y cost). Furthermore, managers should consider nonfinancial factors such as qualit y and timely delivery when making outsourcing decisio ns. 11­8 Opportunity cost is the contribut ion to inco me that is forgone (rejected) by not using a limited resource in its next­best alternat ive use. 11­9 No. When deciding on the quant it y of inventory to buy, managers must consider both the purchase cost per unit and the opportunit y cost of funds invested in the inventory. For example, the purchase cost per unit may be low when the quant it y o f inventory purchased is large, but the 11­1 benefit of the lower cost may be more than offset by the high opportunit y cost of the funds invested in acquiring and ho lding inventory. 11­10 No. Managers should aim to get the highest contribution margin per unit of the constraining (that is, scarce, limit ing, or crit ical) factor. The constraining factor is what restricts or limits the production or sale of a given product (for example, availabilit y of machine­hours). 11­11 No. For example, if the revenues that will be lo st exceed the costs that will be saved, the branch or business segment should not be shut down. Shutting down will only increase the loss. Allocated costs are always irrelevant to the shut­down decisio n. 11­12 Cost written off as depreciat ion is irrelevant when it pertains to a past cost such as equipment already purchased. But the purchase cost of new equipment to be acquired in the future that will then be wr itten off as depreciat ion is often relevant. 11­13 No. Managers tend to favor the alternat ive that makes their performance look best so they focus on the measures used in the performance­evaluat ion model. If the performance­evaluat ion model does not emphasize maximizing operating inco me or minimizing costs, managers will most likely not choose the alternat ive that maximizes operating income or minimizes costs. 11­14 The three steps in so lving a linear programming problem are (i) Determine the object ive funct ion. (ii) Specify the constraints. (iii) Co mpute the...
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This note was uploaded on 10/11/2010 for the course ACCT 321 taught by Professor Cole during the Spring '10 term at University of Miami.

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