Question

Part I. Decision Making

In the reading this week, you’ve learned about a variety of management decisions including:

• Make vs. buy (outsourcing)
• Accepting a special order
• Sell as-is or process further
• Keep or discontinue a product or operating segment
• Product mix when there are capacity constraints
• Keep or drop an existing customer

Part I Requirements:

Select two of the decision types listed above. For each selected decision type:

• Create a hypothetical situation in which management is faced with this decision type.
• Explain the circumstances including both quantitative and qualitative factors which will be considered.
• Evaluate relevant costs including differential costs, avoidable costs, and opportunity costs.
• Identify irrelevant costs including sunk costs and fixed costs.
• Recommend the most appropriate decision for management based on your analysis.

Answer 1

	Make Vs Buy
		ABC Company
	Relevant cost per unit if Dolls are made inside the Company.
	Direct Material	$                                   6.00
	Direct Labor	$                                   2.80
	Supervision	$                                   1.70
	Variable Overhead	$                                   0.60
	Total	$                                 11.10
	Relevant cost per unit if Dolls are purchased from an outside supplier.
	Purchase price	$                                 12.00
	Difference between relevant cost of making and buying Dolls($11.10-$12)
	Profit would be decrease by .90 rounded $1 per period
	Relevant cost: Relevant cost in this case are those cost which can be avoided when purchased starter from outside instead of making.	Direct Material,Direct Labor,Supervision and Variable Overhead
	Sunk Cost: Sunk cost are those cost which is irrelevant for decision.	Depreciation
	Keep or discontinue product or operating segment
		Department A	Department B	Department C	Total
	Sales=(A)	$                     2,68,000.00	$   4,10,000.00	$             2,54,000.00	$ 9,32,000.00
	Variable Manufacturing & Selling Expenses =(B)	$                     1,14,000.00	$   1,99,000.00	$             1,51,000.00	$ 4,64,000.00
	Contribution Margin(A)-(B)	$                     1,54,000.00	$   2,11,000.00	$             1,03,000.00	$ 4,68,000.00
	Fixed Expenses:
	Advertising traceable	$                           9,000.00	$       40,400.00	$                 20,400.00	$     69,800.00
	Depreciation of special equipment	$                         20,700.00	$         7,300.00	$                 15,800.00	$     43,800.00
	Salaries of product line mangers	$                         40,400.00	$       38,600.00	$                 36,000.00	$ 1,15,000.00
	Allocated common fixed expenses	$                         53,600.00	$       82,000.00	$                 50,800.00	$ 1,86,400.00
	Total fixed expenses=(D)	$                     1,23,700.00	$   1,68,300.00	$             1,23,000.00	$ 4,15,000.00
	Net operating income(loss)=(C )-(D )	$                         30,300.00	$       42,700.00	$               -20,000.00	$     53,000.00
	If Department C discontine
	Loss contribution margin		$   1,03,000.00
	Fixed cost that can be avoided
	Advertisement traceable	$                         20,400.00
	Salary of the product line manger	$                         36,000.00	$       56,400.00
	Decrease in net operating income for the company as a whole		$     -46,600.00
	No the prodution and sale of Department C should not be discontinued . If the Department C were discontined, then the net operating income for the company as a whole would decrease by $46600 each quarter.
	Note:Depreciation on special equipment is a sunk cost and irrelevent for decision.The Common cost can be allocated and will continue regardless of whether or not the Department C are discontinued so that are not relevant for decision making.