analytics-for-managerial-decision-making

If outsourcing outsourcing analysis is if a company

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Unformatted text preview: capacity. If outsourcing Outsourcing analysis is if a company continues if manufacture a product in lieu of outsourcing, it foregoes up capacityto produce the other services or products, then the contribution margin that will free the chance to be used on alternative product. The loss of this opportunity has a cost must be considered in the final decision. products also becomes a relevant item in the decision associated with the additional services orAccountants (and economists and others) may use the term “opportunity cost” to describe the costcontinues to manufacture a It is appropriateof outsourcing, it process. In other words, if a company of foregone opportunities. product in lieu to factor opportunity costs into any outsourcing analysis. foregoes the chance to produce the alternative product. The loss of this opportunity has a cost that must be considered in the final decision. Accountants (and economists and others) may use the term “opportunity cost” to describe the cost of foregone opportunities. It is appropriate to factor opportunity costs into any outsourcing analysis. Download free ebooks at bookboon.com 12 Business Decision Logic Analytics for Managerial Decision Making 2.4 Illustration of Capacity Considerations Mueller Building Systems manufactures customized steel components that are sold in kits for the do-it-yourself rancher. The kits include all of the parts necessary to easily construct metal barns of various shapes and sizes. Mueller’s products are very popular and its USA manufacturing plants have been running at full capacity. In an effort to free up capacity, Mueller contracted with Zhang Manufacturing of China to produce all roof truss components to be included in the final kits. The capacity that was released by the outsourcing decision enabled a 10% increase in the total number of kits that were produced and sold. Mueller’s accounting department prepared the following analysis that was used as a basis for negotiating the contract with Zhang: Direct labor to produce trusses Direct material to produce trusses Variable factory overhead to produce trusses Avoidable fixed factory overhead to produce trusses * Relevant costs to produce trusses Contribution margin associated with 10% increase in kit production Maximum amount to spend (including transportation) for purchased trusses $ 3,800,000 4,000,000 2,000,000 1,000,000 $ 10,800,000 3,000,000 $ 13,800,000 Notice that the analysis reveals that Mueller will reduce cost...
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This note was uploaded on 06/07/2013 for the course BA 201 taught by Professor Cuongvu during the Fall '13 term at RMIT Vietnam.

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