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# 0722--01 - if Option_3> ∆ P 3 ∆ P 1 ∆ P 2 Parameter...

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Relevant cost analyses Relevant costs and revenues In general, only the changes in revenues and costs that are likely to result from a given decision are relevant for decision-making. C i . VC i X i FC i where i is the index for the option under consideration. FC i FC i FC The change in fixed costs relative to a given option is the difference between the level of fixed costs that would result from choosing the option i and the level of fixed costs that would result from not choosing the option. P i R i C i R i . VC i X i FC i Marginal profits from option i . Relevant costing: Outsourcing decisions Spartan Bike example (p. 86) The firm is considering three options: (1) produce the component internally, (2) outsource component production and use resultant excess storage space for finished goods storage, or (3) outsource component production and use resultant excess space for increasing production and sales. Decision model and variable P i R i . VC i X i FC i f P i if Option_1 > P 1 , P 2 P 3 if Option_2 > P 2 , P 1 P 3

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Unformatted text preview: if Option_3 > ∆ P 3 , ∆ P 1 ∆ P 2 Parameter estimates and variable constraints ∆ P 1 ∆ R 1 . ∆ VC 1 ∆ X 1 ∆ FC 1 ∆ P 1 . ( ) 4 2 0.4 VC 3000 X ( ) 13000 5000 8000 FC ∆ P 1 45200. ∆ P 2 ∆ R 2 . ∆ VC 2 ∆ X 2 ∆ FC 2 ∆ P 2 . ( ) 12 2 VC 3000 X 2000 FC ∆ P 2 44000 ∆ P 3 ∆ R 3 . ∆ VC 3 ∆ X 3 ∆ FC 3 ∆ P 3 ( ) . 90 200 CM . ( ) 12 2 VC 3000 X ( ) 13000 8000 FC ∆ P 3 45000 Decision > > ∆ P 2 44000 ∆ P 3 45000 ∆ P 1 45200 Note (1)Avoidable fixed costs are generally relevant, unavoidable fixed cost are generally not relevant. (2)Since demand for a firm's products is usually uncertain, it is usuallya good idea to consider outsourcing decisions over a production range. (3)To make "good" decisions based on a decision model like the one shown above, decision-makers must consider other factors not included in the model (and the limitations of the model in general). n...
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0722--01 - if Option_3> ∆ P 3 ∆ P 1 ∆ P 2 Parameter...

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