Ch4+Note+%2B+Additional+Qs+Posting - Chapter 4 Relevant...

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Chapter 4 – Relevant Costs for Non-Routine Operating Decisions Types of Decisions Keep vs. Drop Make vs. Buy Special Order Constraints Relevant Costs CM lost if dropped FC avoided if dropped CM lost/gain on other products/segments Cost of Purchase Saving on VC + Avoidable FC Opportunity Cost (CM lost/gain) Incremental cost of filling the order Opportunity cost of filling the order Incremental revenues from the order CM per unit of the Constrained Resources (Profitability Index - PI) Irrelevant Costs Allocated common costs Sunk Costs Not avoidable FC Sunk Costs Allocated common costs Sunk Costs CM per unit Decision Rule Keep if: CM lost > FC avoided + CM gain Drop if: CM lost < FC avoided + CM gain Make if: Cost of Buy > Cost Saving + Op. Cost (CM loss/gain) Buy if: Cost of Buy < Cost Saving + Op. Cost (CM loss/gain) Accept if: Incremental revenues > total relevant costs Reject if: Incremental revenues < total relevant costs Allocate the most constrained resources to the product with the highest CM of PI.
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Irrelevant Costs Decision Rule
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This note was uploaded on 10/09/2011 for the course MANAGEMENT MGTB03H3 taught by Professor Liangchen during the Summer '09 term at University of Toronto- Toronto.

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Ch4+Note+%2B+Additional+Qs+Posting - Chapter 4 Relevant...

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