Differential Analysis-status quo compared to the revenue and costs of other alternatives in decision making. Short term and long term
Short term-capacity unchanged-one year or less. Effect on cash flow not important and ignored
Differential costs-when a cost differs between alternatives. Removed or added when another alternative method is chosen.
Sunk Costs-previous costs unchangeable by decisions made now or in the future
Differential Costs vs. Total Costs
Deciding between status quo or an alternative
Status Quo Alternative Difference
Sales revenue
$750 $900 $150
Variable costs
(250) (300) (50)
Contribution margin
500 600 100
Fixed costs
(350) (350) 0
Operating profit
$150 $250 $100
Full Cost-all fixed and variable costs to manufacture and sell a unit- covered long term
Variable Costs-needs to always be covered
Special Order-does not affect other sales –short term event
Decision with Short-Run pricing
When special order does not impact current sales and nonrecurring
Estimate the normal operating data for a time period
Determine the value of accepting special order
Select one that value is the highest (from above chart this alternative would be chosen because it produces a profit to the company)
Decision with Long-Run pricing
Setting prices full cost information is relevant in making pricing decision.
Full Cost-all fixed and variable costs to manufacture and sell a unit- covered long term.
Comparing long-run and short-run pricing
Remember example given in class about airline ticket-empty seat vs filling the seat.
Short run-the differential costs-low
Long run-the differential costs-high
Product Life Cycle-R&D through end of product life.
R&D to customer stops purchasing to disposal of product. (I.E.) to...
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...ribution margin per unit of product is the measure used for profit.
Consider that metal frames take ½ hour of machine time and wood frames take 1 hour.
Metal frames –can produce 2 frames per hour x $30 CM per unit=$60 per machine
Wood frames-can produce 1 frame per hour x $30 CM per unit =$30 per machine.
This tells us that the metal frames have a higher per machine hour contribution margin (60 vs 30)
If only 200 machines per month: 400 metal frames (2 x 200) vs 200 (1 x 200)
The Theory of Constraints-method for dealing with constraints for revenue and costs.
Bottlenecks-when work to be done is limited due to other work that has to be done first.
A constraining resource in that it limits one resource in favor of another.
Throughput contribution- is equal to Sales $ subtracting direct material costs and subtracting variables (energy/piecework labor).
[6] Colin Drury, Management and Costing Accounting, (7th edition), Chapter 8, Cost-volume-profit analysis, p. 165-173
Cost-plus pricing, it the industry pricing standard, and is a method to determine a price of the product by finding the cost per unit and then including a mark-up
$384 per unit or "mark up" of 47% vs $764. per unit or "mark up" of 94% (not really a mark up, fixed costs not included).
It was the year 1987 when the Gartner Group popularized the form of full cost accounting named Total Cost of Ownership (TCO)(author, Gartner Total Cost of Ownership). Originally TCO was mainly used in the IT business sector. This changed in the 1980’s when it became clear to many organizations that there is a distinct difference between purchase price and full costs of a products ownership. This brings us towards the main strength of conducting a TCO analysis, besides taking the purchase costs into account, which consist of the amount a money an organization pays for the required service, product or capital outlay. It also considers 1. Acquisition costs; these can consist of sourcing, administration, freight, and taxes. 2. Usage costs, which consists of the costs associated with converting the given product or service into a finished product. And finally 3. End of life cycle costs; the costs or profits incurred when disposing of a product. TCO can be seen as a form of full cost accounting; it systematically collects and presents all the data for each proposed alternative.
. Workshop cost as it needs to be provided with medical equipments and maintain this
“Marginal analysis involves changing the value(s) of the choice variable(s) by a small amount to see if the objective function can be further increased (in the case of maximization problems) or further decreased (in the case of minimization problems)” (Thomas & Maurice, 2012, pp. 91). Marginal analysis is known as “the central organizing principle of economic theory” for its importance and applicability to many aspects of our daily lives as well as our careers (Thomas & Maurice, 2012, pp. 94). The key concepts of marginal analysis include total benefit, total cost, marginal benefit, marginal cost and net benefit. These concepts all come together to play a significant role in the use of marginal analysis to reach the optimal desired outcome.
Composites do most of the things metals can do in a bike frame. Although, often the way you go about building with composites is different than if using metals. With composite construction a mold has to be built to form the required shape and then the fibers and resin are held in the mold to harden. With metal tubing construction, off the shelf tubes a...
Hence the above example shows that costs can be determined as either fixed or variable even in a semi variable cost.
Most bike frames are aluminum now, not steel; occasionally exotic (expensive) materials like titanium and carbon fiber are used. Characteristics of each materials? ___
Cost is known as monetary value that will contribute to the benefit or obtaining any other resources. In other words, cost is a resource that we sacrifice in order to capture profit in the business companies. As an example, we sacrifice electricity, material, labour and value of machine’s life which known as depreciation during the production of a car. Therefore, these sacrifices are known as cost. There are many different views or thoughts from different individual. From a buyer’s perspective, cost of an item or product is known as prices which are charged by the sellers that may include additional charges such as mark-up cost and production cost which make the products more expensive than the original prices
The framing process is probably the fastest part of building a house. A good framing crew can frame an average size house in just a couple of days. The framing of the house consists of the floor system, walls, and roof system. The framing is th...
Therefore, to achieve this objective, managers have to make choices in decision-making, which is the process of selecting a course of action from two or more alternatives (Weihrich & Koontz; 1994, 199). A sound decision making requires extensive knowledge of economic theory and the tools of economic analysis, that are directly related in the process of decision-making. Since managerial economics is concerned with such economic theories and tools of analysis, it is very relevant to the managerial decision-making process.
In business decisions are made based on the analysis of the different factors that affect the business elements due to the nature of the business. The availability of data is the key case for providing accurate analysis on which decisions will be based. On the light of the above mentioned, this paper will provide a description for the differential analysis in dropping /keeping customers, product line offerings, and making or buying decisions. Also, discussion in this paper is going to involve the role qualitative information may have in differential analysis as well as sunk and opportunity cost and explaining why managers must consider those issues.
Total work content for a product assembled on a manual production line is 33.0 min.
Woodman, Chester L., Kurt Kuster. ?Small shop, big decision.? American Machinest (Apr. 2001): 78 EBSCOhost. Online. Nov. 2002 .