W. BentzEMBA 8021 Agenda Today Further thoughts about the Prairie State Paper Co. Chapter 11 problems Quiz today Thinking ahead to the final

W. BentzEMBA 8022 Prairie State Paper Co.

W. BentzEMBA 8023 Interaction of Support Activities Water Steam Electricity 50% 60%20%

W. BentzEMBA 8024 Incremental Costs of Electricity Step-by-step analysis of the service cycle:

W. BentzEMBA 8025 Incremental costs of electricity Matrix model method of estimating incremental cost:

W. BentzEMBA 8026 Net Cost Savings The net cost savings associated with outsourcing are: Incremental cost of electric dept.$15,600 Cost of purchasing electricity 564,000 $ ,280 Net cost savings $ 4,320

W. BentzEMBA 8027 Cost Allocation - Prairie State

W. BentzEMBA 8028 Cost Allocation - Prairie State

W. BentzEMBA 8029 Cost Allocation - Prairie State Combine common terms.

W. BentzEMBA Cost Allocation - Prairie State Written in matrix form.

W. BentzEMBA Inverse x Cost Vector = GSC

W. BentzEMBA Prairie State in Tabular Form

W. BentzEMBA Interdepartmental Allocations

W. BentzEMBA Revised Matrix - Electricity Outsourced Next, we revise the coefficients to reflect the outsourcing of electricity. Let the purchase of electricity be an activity cost to be allocated. This further demonstrates that “activities” can be input costs for costing purposes. Since we changed the situation, the allocation coefficients must be revised.

W. BentzEMBA Revised Equations…. If electric generation is outsourced, we have the revised equations:

W. BentzEMBA The matrix form is: Notice that since the graph is now acyclic, the diagonal elements of the inverse are 1’s.

W. BentzEMBA Prairie State - Revised Table

W. BentzEMBA Revised Inter-Activity Allocations

W. BentzEMBA Interactivity Allocation Demonstration of models in use today Illustrated potential for biasing the costing of activities, and thus the costing of products and programs. Illustrated the additional information imbedded in the reciprocal allocation model. Provided spreadsheets for you to work your own problems and to experiment.

W. BentzEMBA What’s next?

W. BentzEMBA Operating Circumstances Effectively unconstrained One binding constraint Few binding constraints Multiple possible constraints

W. BentzEMBA Cost of Using a Resource Replacement cost Disposal NRV Replacement cost less holding cost Opportunity cost

W. BentzEMBA Environment Effectively Unconstrained Investment and interest factors immaterial--maximize the differential income as in chapter 7. Investment is material, but interest immaterial--Invest until marginal return on investment equals cost of capital.

W. BentzEMBA Environment Effectively Unconstrained Investment and interest factors material-- Maximize the net present value of investments. Firm expands until the remaining opportunities yield zero or negative net present values (risk adjusted).

W. BentzEMBA One Constraint Investment and interest factors immaterial- -Maximize the contribution margin per unit of the constrained resource. Investment material, but interest factor immaterial--Invest until marginal return on investment equals target rate of return. The availability of capital may be a constraint.

W. BentzEMBA Several Constraints Investment and interest factors immaterial--Maximize the total contribution margin while satisfying the constraints (draw constraint lines). Maximize by valuing the extreme points to find a maximum value.

W. BentzEMBA Two Constraints Product A Product B Constraint 1 Constraint 2

W. BentzEMBA Multiple constraints Constraints stable and interest factor immaterial--Select product mix and volumes so as to maximize an objective function. Per unit contribution margin information normally is part of the objective function.

W. BentzEMBA Basic Activity View Outputs INPUTS Input/Output Ratios

W. BentzEMBA Input/Output Relationships INPUTSOUTPUTS Yield or Productivity Efficiency

W. BentzEMBA Basic Activity View Outputs INPUTS Input/Output Utilization Rates Productivity