Relevant Costs for Nonroutine Operating Decisions

1
Relevant Costs forNonroutine Operating
Decisions
Chapter 4

• Key Topics
• Factors that affect decisions
• Opportunity costs
• Avoidable/unavoidable fixed costs
• Qualitative factors
• Uncertainties
• Nonroutine operating decisions
• Accept/reject special order
• Make/buy or insource/outsource
• Keep/drop product, segment, business
• Manage scarce resources
• Product emphasis

2
Process for Non-routine Operating Decisions

• Notice The above exhibit pulls together the
  material from Chapters 2, 3, and 4
• See Exhibit 4.4 in Chapter 4 for a summary of
  decision rules and key factors for each type of
  nonroutine decision

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Opportunity Costs

• Opportunity cost is the profit forgone by
  choosing one alternative versus another
• Examples
• Rent revenue lost by a landlord in the decision
  to use an apartment for storage
• Forgone interest income when funds are used for a
  project instead of invested

4
Avoidable/Unavoidable Fixed Costs

• Sometimes a decision alternative can reduce fixed
  costs
• Examples of avoidable fixed costs
• Store managers salary if store is closed
• Insurance on production equipment if production
  is outsourced and equipment is sold
• Examples of unavoidable fixed costs
• Rent on excess floor space (assuming no
  alternative use)
• Salary of CEO if one store is closed

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Exercise Make/Buy or Insource/Outsource
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Special Order
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Exercise Keep or Drop
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Qualitative Factors

• Examples of qualitative factors
• Effect on brand name
• Employee reactions
• Ability to deliver
• Supplier quality
• Focus on core competencies
• Customer service
• How can you learn to identify qualitative
  factors
• Classroom problems
• Real world decisions

9
Uncertainties

• Examples of uncertainties in non-routine
  decisions
• Revenue and cost estimates
• Interpreting quantitative results
• Relevant range of operations
• Qualitative factors
• Dependence among product lines
• Alternative uses for capacity
• Why is it important to consider uncertainties?
• How can you learn to identify uncertainties?

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Exercise Constrained Resources
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Product Mix and Constrained Resources
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Multiple Constraints Using Solver
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Linear Programming Solution Using Solver

• Determine the contribution margin for each
  product and create the objective (target)
  function to be maximized
• List the amount of constrained resources required
  per product and the total amount of constrained
  resources available Create formulas for the
  resource constraints
• Set up an Excel spreadsheet
• Use Excel Solver to maximize the objective
  function
• Interpret the Solver output