Question

1) Describe what makes a cost “relevant” when making a decision between two alternatives.

2)Imagine you are a manager of a snack food company. You need to make a decision whether you should manufacture a new cheese curl or purchase it from another manufacturer and re-sell it to your customers.   Discuss what factors are relevant in this decision and how you would make the right decision.

3) What is a constraint in a manufacturing process? Why does it make sense to concentrate on contribution margin relative to the constrained resource instead of contribution margin per unit in these cases?

Answer 1

Answer-

1)

In decision making the cost which are incremental costs,must be considered.The costs which are avoidable is considered while unavoidable cost are not considered.

The main reason for not considering this cost is,their nature of being past or sunk cost.Whether we take decision to continue or not to vontinue these costs are not likely to be changed.Hence these costs are not considered.The cost which is specifically for any order must be considered.Under strategic cost management, we uses the best of the decision, while looking several aspects of it.

If we namely consider some of the cost then we have

All variable cost must be considered

Only avoiable fixed cost must be considered

Any cost as a result of accepting order must be considered.

2)

As a manager you would analyse your current cost structure.You should catergorise your variable costs and fixed costs,In the fixed cost you should trace that how much of the cost can be avoided,if decision to buy the product is to go with.

Sometimes accepting to buy from outsider also provide with the benefits of free space which can be let out to the outsiders.This is opportunity cost analysis.This cost must also be considered,while accepting any decision.

Overall a basic rule is to trace your variable cost and avoidable fixed cost,along with the benefits of free space.The benefits from free space must favor the decision of buying the product.

3)

In manufacturing process,several types of constraints are possible,some of them are

Labor hour

Machine hour

Specific raw materials

Demand

In anlysing these types of constraints,we must calculate the contribution per unit constraints.After this we must provide rank I to the highest contribtuion per constraint and then rank II to next best alternative.

Now we will be preparing a statement of product mix based on constraints calculations,

Under this statement we will produce the First the Rank I product, and check the availability of remaining units of constraints.Then we must check the possibility of producing Rank II product and do the same process until the constraints capacity is fully utilised.

Thats it,

Please comment for any other specific explanation,

Thanks