Managerial Decision Making
Part A
For this activity, you need to complete Problems 5-56 (pp. 218) and 5-57 (pp. 218). First, however, you need to perform the following before completing the problems.
As a prerequisite to the use of financial information as a basis for managerial decision-making, you must be familiar with the notion of relevance. Relevant information is the predicted future costs and revenues that will differ among the alternatives. For example, sunk costs are always irrelevant; opportunity costs are always relevant. You will examine several decision contexts for the use of financial information within an organization. A decision model is beneficial as a frame of reference. Exhibit 5-1 (p. 184) looks at the decision process and the role of information.
Another important topic is pricing. Read about the concept of pricing, general influences on pricing in practice, and the role of costs in pricing decisions. The traditional bases for pricing have included cost and cost-plus methodologies. The base for cost-plus pricing can be variable cost, fixed cost, total manufacturing cost, or full cost. See Exhibit 5-8 (p. 199) for an illustration of these cost-plus bases for pricing.
The target costing process is diagrammed in Exhibit 5-11 (p. 204). The ITT Automotive case provides a step-by-step example of the target costing methodology.
See the “Summary Problem for Your Review” (Custom Graphics, p. 207) and the “Business First” inset (p. 206) for more examples of the use of relevant financial information for making marketing decisions.
Part B
Complete text Problems 5-59 (pp. 219), 6-32 (pp. 252), and 6-56 (p. 261). Show all computations.
PART A
5-56: Pricing of special order
Q1.
The total net income increment is given by:
Q2.
The lowest unit sales are equal to the equal of the unit’s variable manufacturing cost, which is given by
Q3.
All the numbers offered are irrelevant except for which is the number that is equalized to the shown variable cost per unit of the manufacturing costs.
Q4.
Selling price:
Plat capacity is 2400 product units; hence the new plant capacity would be:
Total sales would be:
Fixed expenses:
Variable expenses:
Variable and fixed costs added together:
5-57 pricing and confusing variable and fixed costs
Q1.
Q2.
Q3.
Kister’s president must consider that if they accept the offer, it could lead to more lucrative orders from the same firm. Also, the president should assess if Kister is ready to invest $740 000 in the organization or if the firm would prefer to avoid market rivalry against its competitors.
Q4.
- The new fixed cost of manufacturing budgeted would be given by:
- The changes would not affect my answer since the fixed costs are irrelevant since the total would still be the same irrespective of the order given.
PART B
5-59 Target costing
Q1.
The company would not manufacture the motor since it would be unable to sell them at the budgeted $32.40, while the market research has established the market price to be at $26.00. even with the company not including the profit margin, the cost would be higher than that of the market by $1.00.
Q2.
The firm would apply the target cost by starting the garage door opener motor at the market price of $26. Hence, the highest acceptable manufacturing expenses would be;
Q3.
The firm’s management would have to assess if they could design the garage-door-opener motor and its production procedure to ensure that the production expenses are maintained below $21.67. Hence, the company would require assessing the motor’s design specifications and manufacturing procedures. The product should not be manufactured if there is no strategy of decreasing the costs to the acceptable $21.67 or below. Target costing forces the management to assess ways of lowering production costs by determining product and procedure design (Horngren et al., 2014). Rather than taking the design and process as provided and determining the market to see if the firm can sell the product for a high enough price, the management would attempt to design a product through a procedure that meets the constraints of the market.
6-32: make or buy
Q1.
- Cost of making
- Purchasing cost
- Comparison
The making cost is $450000 while the purchasing price is $420000, hence the difference of $30000.
Q2.
Since the statistical difference is minor, the qualitative variable could majorly affect the decision. The firms that apply the just-in-time system need assurance of the timeliness and quality of the materials, components, and parts suppliers (Horngren et al., 2014). Thus, in the case of Bose, small and local firms could not be reliable; Bose should be willing to spend the $30000, the purchasing advantage, to ensure it has overall control over the component supply. Besides, the division manager might have made the right decision based on the wrong reasons. He ignored the fixed expenses, mistakenly believing that making the component would be less expensive by about $0.2 for every unit. The $50000 of the avoidable fixed costs makes the purchase alternative cheaper by $30000. Therefore, if the manager decides to make the component, it must be aligned to forgoing the profit of $30000 that has a long-term qualitative advantage over the $30000, though not attributed to thebid beings higher than the variable expenses.
The variable selling expenses of $2.90 is the only unit cost that would be considered relevant in determining the minimum sales of the 7000 units.
