© 2007 Pearson Education Canada Slide 8-1 Relevant Information and Decision Making: Marketing Decisions 8

© 2007 Pearson Education Canada Slide 8-2 Relevant Costs and Revenues Relevant Costs or Revenues The predicted future costs or future revenues that differ among the alternatives being considered Historical costs are not by themselves relevant; historical data are useful only in that they may help predict future events Examples: special sales orders, deleting / adding products or departments, optimal use of limited resources, make of buy decisions, sell or process further decisions

© 2007 Pearson Education Canada Slide 8-3 Accuracy and Relevance Ideally one would like relevant and accurate information However decision makers must weigh the extra cost of obtaining more accurate information, against the benefit which the increased accuracy offers

© 2007 Pearson Education Canada Slide 8-4 Decision Process and Role of Information Historical Information Other Information Prediction Method Decision Model Implementation & Evaluation Feedback Collect relevant information Use the information as a basis for predicting the future Make a decision based on the quantitative and qualitative information Chosen action is implemented and evaluation of performance is main source of feedback

© 2007 Pearson Education Canada Slide 8-5 Special Sales Order special one-time order from a customer at a reduced price WithNoSpecial Order Relevant revenue: $13.00$1,300,000$0 Relevant costs: $12.00(1,200,000)0 Incremental income$100,000$0

© 2007 Pearson Education Canada Slide 8-6 Deleting or Adding Products or Departments special decision to add or delete a product line or department KeepDrop GroceryGroceryDifference Relevant revenue:$1,900$1,000$900 Relevant costs: Variable costs1, Fixed costs (avoidable) Incremental income$215$50$165

© 2007 Pearson Education Canada Slide 8-7 Optimal Use of Limited Resources when something constrains or limits operations labour hours, machine hours, raw material, space determine contribution margin per the limiting factor allocate usage to maximum profit SilverGold Contribution margin per unit$12.00$27.00 Units per hour3010 Contribution margin per hour$360.00$ allocate capacity to “Silver” up to expected demand, and then allocate remaining capacity to “Gold”

© 2007 Pearson Education Canada Slide 8-8 Pricing Decisions Price is a function of cost elasticity of demand competitors actions marketing considerations business strategy When relating cost to price always consider the diversity in costs among the various products Variable Costs Variable Costs Contribution Approach Absorption Approach Mark-Up 52.67% Fixed Costs Mark-Up 5.26%

© 2007 Pearson Education Canada Slide 8-9 Target Pricing & Target Costing Traditional Approach Determine costs and add on a mark-up to set selling prices Target Costing and Target Pricing First determine the price at which the product will sell Then design a product to be produced at a low enough cost to provide an adequate profit margin over target cost Target Price Target Costs + Mark-Up = Price - Margin =

© 2007 Pearson Education Canada Slide 8-10 “Cost-Plus” Often the basis for target prices The size of the “plus” depends on target (desired) operating outcomes Target prices can be based on a host of different markups based on a host of different definitions of cost There are many ways to arrive at the same target price