MGMT_201_(Ganguly)_Lecture_15_post - MGMT 201(Ganguly MGMT...

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Unformatted text preview: MGMT 201 (Ganguly) MGMT Lecture 15: Decision Making Lecture contd. contd. (Chapter 14 contd.) Outsource a Product or Service A decision concerning whether an item decision should be produced internally or purchased from an outside supplier is often called a “make or buy” decision. often Let’s look at another decision faced by the Let’s management of Worldwide Airways. management 2 Outsource a Product or Service An Atlanta bakery has offered to supply the in-flight An desserts for 21¢ each. desserts Here are Worldwide’s current cost for desserts: 3 Outsource a Product or Service Not all of the allocated fixed costs will be saved if Worldwide purchases from the outside bakery. 4 Outsource a Product or Service If Worldwide purchases the dessert for 21¢, If it will only save 15¢ so Worldwide will have a loss of 6¢ per dessert purchased. loss Wow, that’s no deal! 5 Outsource a Product or Service Beware of Unit-Cost Data For decision-making purposes, unitized For fixed costs can be misleading. fixed 6 Add or Drop a Service, Product, or Department One of the most important decisions One managers make is whether to add or drop a product, service or department. product, Let’s look at how the concept of relevant Let’s costs should be used in such a decision. costs 7 Add or Drop a Product Due to the declining popularity of digital Due watches, Swick Company’s digital watch line has not reported a profit for several years. An income statement for last year is shown on the next screen. is 8 Add or Drop a Product 9 Add or Drop a Product If the digital watch line is dropped, the fixed If general factory overhead and general administrative expenses will be allocated to other product lines because they are not avoidable. not 10 10 Add or Drop a Product The equipment used to manufacture digital The watches has no resale value or alternative use. watches 11 11 Add or Drop a Product Should Swick retain or drop the digital watch segment? 12 12 Add or Drop a Product 13 13 Add or Drop a Product 14 14 Summary DECISION RULE Swick should drop the digital watch segment Swick only if its fixed cost savings exceed lost contribution margin. contribution 15 15 Special Decisions in Manufacturing Firms Joint Products: Sell or Process Further A jjoint production process resulting in oint two or more products. The point in the production process where the joint products are identifiable as separate products is called the split-off point. split-off 16 16 Joint Processing of Cocoa Bean Cocoa beans costing $500 per ton Joint Production process costing $600 per ton Cocoa butter sales value $750 for 1,500 pounds Split-off point Cocoa powder sales value $500 for 500 pounds Separable process costing $800 Total joint cost: $1,100 per ton Instant cocoa mix sales value mix sales $2,000 for 500 pounds 17 17 Joint Products Relative Sales Value Method 18 18 Joint Products Relative Sales Value Method $750 ÷ $1,250 = 60% 19 19 Joint Products Relative Sales Value Method 60% × $1,100 = $660 20 20 Joint Products Relative Sales Value Method 21 21 Joint Products Cocoa butter is sold at the end of the joint Cocoa processing. processing. Cocoa powder may be sold now or processed Cocoa into instant cocoa mix. Further processing costs of $800 will be incurred if the company elects to make instant cocoa mix. elects 22 22 Joint Products Thecocoa powde should be r proce d into instant cocoa m sse ix. proce 23 23 …still not done with Chapter 14! Next class: Computing Next Profitability when you have Limited Resources Limited 24 24 ...
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