Relevantcosts for DM

Relevantcosts for DM - Decision rule Only revenues Maximize...

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DR.KIANI RELEVANT COSTS FOR SHORT TERM (TACTICAL) DECISION MAKING OBJECTIVE: To provide relevant cost or benefit information to help decision-maker to make a right decision among the alternatives available. Example: Make or buy decision Accepting or rejecting a special offer Adding or dropping a product or segment Sell or process further Equipment replacement decision Utilization of scarce (constrained) resources. Definition: A relevant cost or benefit is a cost or benefit that differs among alternatives. INDENTIFYING RELEVANT COSTS Costs that can be eliminated (in whole or in part) by choosing one alternative over another are avoidable costs. Avoidable costs are relevant costs. Unavoidable costs are NEVER relevant and include: Sunk costs….a cost that has already been incurred and that cannot be Avoided regardless of what a manager decides to do. Future costs that do not differ between the alternatives. Factors relevant to decision
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Unformatted text preview: Decision rule Only revenues Maximize revenue Only variable costs Minimize cost Costs and benefits within relevant range and below capacity. Maximize total CM Costs and benefits within relevant range and at capacity. Maximize unit CM per constraining factor(s) Example: Constrained is machine hours availability Prouduct A Product B Best choice Machine hours/unit 4 6 CM per unit $10 $12 B wrong choice! Why? CM per machine hour $2.50 $2.00 A Costs and benefits beyond range Maximize net decision benefit or Minimize net decision cost Example: Product A Product B Best choice Total CM $130,000 $120,000 A wrong choice! Why? Additional FC <$90,000> <$70,000> Net benefit $40,000 $50,000 B In summary: To make a decision: Eliminate costs and benefits that do not differ, in total, between alternatives. Base the decision on the remaining costs and benefits....
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This document was uploaded on 03/28/2012.

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Relevantcosts for DM - Decision rule Only revenues Maximize...

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