Slide 1 ___________________________________ 8.3 Re le va nt Costs o Re le va nt Costs De finition ___________________________________ o c osts that diffe r fr om one alte r na tive busine ss opportunity to a nothe r o AKA avoida ble c osts ___________________________________ o Costs that will be e liminate d if anothe r a lte rna tive is c hose n o Othe r te rms use d to de fine re le va nt c osts o Diffe re ntia l c osts ___________________________________ o Inc re me nta l c osts Avoida ble Cost ___________________________________ ___________________________________ 2005 K D Ha the wa y-Dia l ___________________________________ Slide 2 ___________________________________ Othe r re le va nt c ost te rms o Diffe re ntia l c osts ___________________________________ o T he diffe re nc e in c osts be twe e n two a lte r na tive s ___________________________________ o Inc re me nta l c osts o T he inc r e a se in c osts fr om one a lte r na tive to anothe r ___________________________________ ___________________________________ ___________________________________ 2005 K D Ha the wa y-Dia l ___________________________________ Slide 3 ___________________________________ Irre le va nt Costs o Ir re le va nt c osts o Sunk c ost ___________________________________ o Unavoida ble c osts o Alre a dy inc urre d c ost o Should be ignore d ___________________________________ o F utur e c osts tha t do not diffe r be twe e n the a lte rnative s o Unavoida ble o Should be ignore d ___________________________________ ___________________________________ ___________________________________ 2005 K D Ha the wa y-Dia l ___________________________________
Slide 4 ___________________________________ Ide ntifying Re le va nt Costs o Why ide ntify re le vant c osts? ___________________________________ o Should only c onside r the c osts of two or more a lte r na tive s tha t would impa c t the de c ision ___________________________________ o Irr e le vant c osts will only c lutte r the de c ision proc e ss o What is a re le va nt c ost? ___________________________________ o Costs that a re avoidable , inc re me nta l or diffe re ntia l ___________________________________ ___________________________________ 2005 K D Ha the wa y-Dia l ___________________________________ Slide 5 ___________________________________ Ide ntifying Re le va nt Costs E xample : Jill is a Junior in c olle ge ___________________________________ and ha s be e n offe r e d two inte r nships for the summe r. T he fir st inte r nship is for a busine ss in ___________________________________ he r home town a nd the se c ond inte r nship is in China ___________________________________ Ide ntify the r e le vant c osts for both inte r nships ___________________________________ ___________________________________ 2005 K D Ha the wa y-Dia l ___________________________________ Slide 6 ___________________________________ Inte rnship E xa mple Inte r nship a t home Inte r nship in China Inc ome $3,840.00 $ 0.00 ___________________________________ Inc ome E a r ne d $3,840.00 $ 0.00 Room & boa r d $ 0.00 $3,200.00 T r ave l $ 25.00 $2,000.00 ___________________________________ Inc ide nta ls $ 200.00 $ 200.00 T otal Cost $ 225.00 $5,400.00 ___________________________________ T otal pr ofit (c ost) $3615.00 $(5,400.00) Va lue of expe r ie nc e in ? ? la nding fir st job ___________________________________ L ong te r m value to ? ? c a r e e r T ime with he r family ? ? ___________________________________ 2005 K D Ha the wa y-Dia l ___________________________________
Slide 7 ___________________________________ Ma ke or Buy o Ve rtic al inte g r ation ___________________________________ o De finition o All the parts of the va lue c ha in of a produc t tha t is produc e d by a single c ompany ___________________________________ o Adva nta g e s to ma king o L e ss de pe nde nt on its supplie rs o Be tte r qua lity c ontrol ___________________________________ o Company re a lize s profits from parts and ma te r ia ls o Adva ntag e s to buying ___________________________________ o E c onomie s of sc ale o Hig he r qua lity at a lowe r c ost ___________________________________ 2005 K D Ha the wa y-Dia l ___________________________________ Slide 8 ___________________________________ Ma ke or Buy Ross & Simons ma nufa c ture skate boards. Be low is c ost data for whe e ls on the ir most popular br a nd. T he re is no ___________________________________ othe r use for the spe c ia l e quipme nt use d in ma king the ska te boa rds whe e ls. R oss & Simons have be e n looking at outsourc ing the pa rt. T he y have found a ___________________________________ supplie r who will ma ke it for $10. Should the y c ontinue to make or should the y buy? Pe r Unit 10,000 Units ___________________________________ Dire c t Mate rials $ 5 $ 50,000 Dire c t L abor 2 20,000 Va ria ble Ma nufa c turing ove rhe a d 1 10,000 ___________________________________ Supe rvisor’s Sala ry 1 10,000 De pre c ia tion of Spe c ia l E quipme nt 1 10,000 Alloc a te d g e ne ral ove rhe ad 2 20,000 ___________________________________ T otal c ost 12 $120,000 2005 K D Ha the wa y-Dia l ___________________________________ Slide 9 ___________________________________ Ma ke or Buy 10,000 units ___________________________________ Ma ke Buy Dire c t Ma te ria ls $50,000 Dire c t L a bor $20,000 ___________________________________ Va r iable Ma nufa c tur ing ove r he a d $10,000 Supe r visor’s Salary $10,000 De pr e c ia tion of Spe c ia l Not ___________________________________ E quipme nt Re le va nt Alloc a te d Ge ne ra l Ove r he a d Not Re le va nt Outside Pur c hase pr ic e ($10/ unit) $100,000 ___________________________________ T ota l c ost $90,000 $100,000 Diffe r e nc e in fa vor of ma king $10,000 ___________________________________ 2005 K D Ha the wa y-Dia l ___________________________________
Slide 10 ___________________________________ Spe c ia l Orde rs o Spe c ial or de r s ___________________________________ o One time or de rs o Not pa rt of a c ompa ny’s ongoing busine ss ___________________________________ o Usua lly hig h volume with a disc ounte d pric e o Advantage s ___________________________________ o Use e xc e ss c apac ity o Inc re me ntal inc r e ase in r e ve nue o Disa dvanta ge s ___________________________________ o Pote ntia l to upse t c urre nt c ustome rs if the y be c ome a ware of the pric e diffe r e ntial ___________________________________ 2005 K D Ha the wa y-Dia l ___________________________________ Slide 11 ___________________________________ Spe c ia l Orde rs Christma s-In- July Inc . produc e s a simple orname nta l tre e toppe r ___________________________________ that the y se ll in the Pa c ific Northwe st. A F lorida c ompany who is c urre ntly se tting up its Christma s a ds is inte reste d in the toppe r for both the a ds a nd store displays. T his is a one time orde r that will ha ve no e ffe c t on the c ompany’s normal sale s a nd would not ___________________________________ c hang e the total a mount of the c ompany’s fixe d c osts. • T he va ria ble e xpe nse s would be $0.35 le ss pe r unit on this orde r than on normal sa le s. ___________________________________ • Dire c t la bor is a varia ble c ost in this c ompa ny. • T he c ompa ny’s normal a c tivity le ve l is 1,800 units for the ye a r. • T he y ha ve c a pa c ity for a nothe r 1,000 units. ___________________________________ • T he norma l se lling whole sale pric e is $4.00 pe r unit. • T he c ompa ny has offe re d to pa y $3.60 pe r unit. ___________________________________ 2005 K D Ha the wa y-Dia l ___________________________________ Slide 12 ___________________________________ Spe c ia l Orde rs Be low is Christma s- In- July Inc c ost of produc ing and se lling a n ___________________________________ orname nta l tre e toppe r. Dire c t Ma te ria ls $1.20 Dire c t L a bor 0.50 Va riable Ma nufa c turing ove r he a d 0.25 ___________________________________ F ixe d Ma nufa c tur ing ove rhe a d 0.15 Va riable se lling & a dministr a tive e xpe nse 0.10 F ixe d se lling & a dministra tive e xpe nse 0.15 ___________________________________ T ota l c ost $2.35 Should the y a c c e pt the or de r? ___________________________________ ___________________________________ 2005 K D Ha the wa y-Dia l ___________________________________
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