decisions involving alternate choices

8/11/2019 Decisions Involving Alternate Choices

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AMITABHA MAHESHWARI

FACULTY(FINANCE)INC BHAVNAGAR


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OBJECTIVE

To Understand: Nature of Managerial Decision Making(SESSION-1)

Characteristics of Costs for Decision-Making(SESSION-2)

Alternative Choice Decisions(SESSION-3&4)

UNDER IT WE WILL DISCUSS

DECISION TO MAKE OR BUY

DECISION TO ACCEPT A SPECIAL ORDER

DECISION TO CONTINUE OR DROP A PRODUCT LINE

DECISION REGARDING EQUIPMENT REPLACEMENT

DECISION REGARDING CONSTRUCTION OF FACILITIES

DECISION REGARDING SELLING OR FURTHER PROCESSING

AND OTHER ASPECTS


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A firm that is presently buying a product or part from

outside may consider to manufacture that product or part

in the firm itself.

A firm manufacturing a product in its factory and may be

considering purchasing the same from an outside supplier.

When is make and buy decision is required


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DECISION TO MAKE OR BUYA company manufactures a wide range of parts and also

buys many parts from external suppliers. One of the part

No. 101 The monthly requirement of this part is 1,000

units and the standard cost for one unit is:

Rs.

Direct material 40.00

Direct labor 20.00

Variable manufacturing overhead 20.00

Fixed manufacturing overhead 35.00

115.00


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DECISION TO MAKE OR BUYMaterials manager suggested that the company could

save money if it was purchased from an outside

supplier willing to supply the quantity required by

Zenith at Rs. 100 per unit. He estimated that if the

part is bought from outside, the fixed clerical costwould increase that if part is bought from outside,

the fixed clerical cost would increase by Rs. 1,500

and the variable handling cost would be Rs. 5 perunit. The plant manager reported that if the

manufacture of Part No.101 were discontinued there

would be no change in fixed manufacturing

overheads.


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DECISION TO MAKE OR BUYSolution :-Under incremental approach

Make Buy

Direct material 40,000

Direct Labor 20,000

Variable Manufacturing overhead 20,000

Buy decision

Purchase cost 1,00,000

Handling cost 5,000

Clerical cost 1,500

80,000 1,06,500Decision:- Here make cot is less then to buy, the company shouldcontinue to manufacture Part No. 101.


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Other aspects that should be taken into account while

making a decision of this kind are:

Value of facilities that would be released if the part is notmanufactured,

Reliability of the external supplier,

Control over the quality of the external supplier,

Difficulty in retrenching or using labor for some other

purpose if manufacture of the part is discontinued.


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Decision to accept a Special Order

Special orders or one-time orders often have differentcharacteristics than recurring orders.

Order should be evaluated based on costs relevant to the situationand the goals of the company.

Other factors influencing special-order pricing decisions may be;

effect on regular customers and special order customers turningregular customers.


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Q.N.-2 Crisp chocolate company is Operating at only of 60%of capacity due to slow holiday season sales. a social

service organization approaches the company with a

proposal that company produce 10,00,000 chocolate bars

of 25 gms to be sold for Rs.1 by members of the socialservice organization to raise money for poor students. The

proposal call for a Rs.0.55 purchase price per bar for the

social service concern. The chocolate bar can be produced

with the firms current excess capacity. The firms chiefaccountant prepares the following cost estimates

associated with the production and sale of the chocolate

bars.


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Total cost(Rs.) Unit Cost(Rs.)Direct materials 2,50,000 0.25

Direct labor 1,00,000 0.10

Manufacturing overhead 2,50,000 0.25(60% is allocated fixed overhead )

Variable selling and

administrative cost 50,000 0.05

6,50,000 0.65


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Solution:-

Rs.

Direct Materials 0.25

Direct labor 0.10

Variable manufacturing Overhead(40%) 0.10

Variable Selling and Administration cost 0.05

Incremental cost 0.50

Sales price 0.55Incremental Profit 0.05

Decision:-We see that accepting the order adds Rs. 0.05

per bar or Rs.50,000 in total, to Crisp Chocolates profit.


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Decision to Continue or Drop a Product line

Decision concerning the discontinuation of a

product should consider;

Complementary/competitive nature of the products

of the company

Impact on the image of the company

Effect on the motivation of the employees

Value of resources released on discontinuation


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Decision Regarding Equipment

ReplacementImportant decision involving alternative

choices is whether or not to buy new capital

equipment.

Economic advantage offered by theinvestment is the realization of operating cost

savings which are translated into increased net

profit.


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Decision Regarding Construction of

facilities Decision to replace or addition to the equipment has

been taken, the company might be in a position toconstruct its own facilities apart from the possibility ofgetting the same thing done from outside sources.

While taking this decision, no attempt must be made

to spread total manufacturing overheads over regularbusiness operations as well as the new project.


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Decision Regarding Selling or

Further ProcessingWhether an item is to be sold at an intermediate stage

or whether it should be processed further and sold as afinished product is another decision that managers areforced to make.

Where further processing entails additional facilities, a

capital investment decision is required, but if facilitiesand spare capacity already exist,


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Decision Regarding Selling or

Further ProcessingOTHER ASPECTS

Technical know-how and skill of the firm to processthe product further

Additional working capital requirements as aconsequence of further processing

Flexibility in hiring and retrenching people Marketing set-up for distributing the finished product


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Decisions Facing Management

Role of cost in decision making

Relevant costs

Contribution approach in decision making

Relevance and cost behavior

Short-term and long-term implications of decisions

Opportunity costs in Decision making


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Your Client has recently leased facilities for manufacturing a

new product. Based on studies made by his staff, thefollowing data have been made available to you:

Estimated annual sales 24,000 Units

Estimated Costs Rs.Material 96,000

Overheads (Fixed) 24,000

Adm. Expenses (Fixed) 28,800Selling Expenses are expected to be 15% of sales and profit is

expected to be 1.02 per unit. Find out selling price per unit and

B.E.P.


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