RELEVANT

INFORMATION FOR
DECISION MAKING
JBCG
Introduction
• Decisions to be made by managers:
• Replacing an asset
• Outsourcing a product or part
• Allocating scarce resources
• Manipulating sales mix
• Special pricing of orders
Procedure for a decision choice:
• Step 1: The necessity of making a decision becomes
eminent.
• Step 2: Decision choices or alternatives are identified.
• Step 3: The relevant costs and benefits associated with
each decision alternative identified in step 2 are calculated.
• Step 4: The decision alternative providing the largest net
benefit to the organization is selected.
Characteristics of a relevant
information:
• Be associated with the decision under consideration.
• Be important to the decision maker.
• Have a connection to, or bearing on, some future
endeavor.
Definition of Terms
• Incremental revenue – amount of revenue that varies
across decision choices
• Incremental cost – amount of cost that varies across
decision choices
• Incremental profit/loss – difference between incremental
revenue and incremental cost
• Opportunity cost – represents the benefit forgone because
one course of action is chosen over another
• Sunk cost – cost which is irrelevant to a decision
Outsource Decisions
Present Relevant
Manufacturing Cost Cost
DM $2.40 $2.40
DL 3.00 3.00
VOH 0.80 0.80
FOH 1.70 0.50
Total Unit Cost $7.90 $6.70
Quoted Price from Supplier $7.00
Scarce Resource Decisions
• Essential to production activity but have limited
availability.
• Scarce resources include:
• Machine time
• Skilled labor time
• Raw materials
• Production capacity
• Other inputs
Scarce Resource Decisions
Drill Table Saw
SP per Unit (a) $80 $120
Var.Production Cost/unit
DM $45 $60
DL 12.50 15
VOH 9.50 18
Total Var Cost $67 $93
Unit CM(c=a-b) $13 $27
# of switches required per unit(d) /1 /3
CM per switch $13 $9
Mathematical Programming
• Refers to a variety of techniques used, when scarce resources
are multiple, to allocate limited resources among activities to
achieve a specific goal or purpose.
• Linear programming (LP) is one method to find the optimal
allocation of scarce resources in a situation involving one
objective and multiple limiting factors.
Sales Mix Decisions
• Refers to the relative product quantities composing a
company’s total sales.
• Factors affecting company’s sales mix:
• Product selling prices
• Sales force compensation
• Advertising expenditures
Sales Mix Decisions
Product Info Standard Home Deluxe Professional
Unit SP $80 $450 $900
Var Cost
DM $33 $185 $425
DL 12 75 245
VOH 15 45 90
Total Var Cost $60 $305 $760
Product CM $20 $145 $140
Var Selling Exp (8) (45) (90)
CM/unit $12 $100 $50
Total Fxd Cost
Production $4,200,000
S&A 1,100,000
Total $5,200,000
Sales Mix Decisions
Unit Current Sales IS Info
CM Volume in Units
Standard $12 52,000 $624,000
Home Deluxe 100 39,000 3,900,000
Professional 50 15,000 750,000
Total CM $5,274,000
Fxd Expenses (5,300,000)
Prod line income at present $(26,000)
volume and sales mix
Special Order Decisions
• Situations include:
• Jobs that require a bid
• Are accepted during slack periods
• Are made to a particular buyer’s specifications
Special Order Decisions
Normal Costs Relevant Costs
Per unit cost for slicers
DM $90 $90
DL 25 25
VOH 35 35
Var Selling Expense 20 0
Total Variable Cost $170 $150
Fixed Factory Overhead 30
Fixed S&A Expense 20
Total cost per slicer $220
Product Line and Segment Decisions
Economy Standard Deluxe Total
Sales $8,000 $9,800 $3,000 $20,800
Total direct var.exp. (5,400) (5,700) (2,200) (13,300)
Total CM $2,600 $4,100 $800 $7,500
Total Fxd Exp (2,100) (3,700) (965) (6,765)
Net Income(loss) $500 $400 $(165) $735
Details of fixed expenses
Avoidable fixed expenses $1,200 $3,000 $450 $4,650
Unavoidable fixed expenses 600 420 300 1,320
Allocated common expenses 300 280 215 795
Total $2100 $3,700 $965 $6,765
Product Line and Segment Decisions
• Segment Margin represents the excess of revenues
over direct variable expenses and avoidable fixed
expenses.
Product Line and Segment Decisions
Economy Standard Deluxe Total
Sales $8,000 $9,800 $3,000 $20,800
Total Direct Var Exp (5,400) (5,700) (2,200) (13,300)
Total CM $2,600 $4,100 $800 $7,500
Avoidable fxd exp (1,200) (3,000) (450) (4,650)
Segment Margin $1,400 $1,100 $350 $2,850
Unavoidable fxd exp (600) (420) (300) (1,320)
Product line result $800 $680 $50 $1,530
Allocated cmn exp (300) (280) (215) (795)
Net Income (Loss) $500 $400 $(165) $735
Product Line and Segment Decisions
Particulars (in 000’s)
Current net income $735
Decrease in income due to elimination of Deluxe (350)
New Net Income $385
Proof:
Total CM of Economy and Standard Lines $6,700
Less avoidable fxd exp of Economy and Standard Lines (4,200)
Segment Margin of Economy and Standard Lines $2,500
Less all remaining fxd expenses (2,115)
Remaining income $385
 CREATING A BETTER
LEARNING EXPERIENCE
JBCG

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