1. Relevant Costs for Nonroutine Operating Decisions
Chapter 4
Key Topics:
Factors that affect decisions:
Opportunity costs
Avoidable/unavoidable fixed costs
Qualitative factors
Uncertainties
Nonroutine operating decisions:
Accept/reject special order
Make/buy or insource/outsource
Keep/drop product, segment, business
Manage scarce resources
Product emphasis
Chapter 4

2. Process for Non-routine Operating Decisions
Notice: The above exhibit combines the material from Chapters 2, 3, and 4
See Exhibit 4.4 in Chapter 4 for a summary of decision rules and key factors for each type of nonroutine decision
Chapter 4

3. Opportunity Costs
Opportunity cost is the profit forgone by choosing one alternative versus another
Examples:
Rent revenue lost by a landlord in the decision to use an apartment for storage
Forgone interest income when funds are used for a project instead of invested
Chapter 4

4. Avoidable/Unavoidable Fixed Costs
Sometimes a decision alternative can reduce fixed costs
Examples of avoidable fixed costs:
Store manager’s salary if store is closed
Insurance on production equipment if production is outsourced and equipment is sold
Examples of unavoidable fixed costs:
Rent on excess floor space (assuming no alternative use)
Salary of CEO if one store is closed
Chapter 4

5. Exercise: Make/Buy or Insource/Outsource
Chapter 4

6. Special Order
Chapter 4

7. Exercise: Keep or Drop
Chapter 4

8. Qualitative Factors Examples of qualitative factors:
Effect on brand name
Employee reactions
Ability to deliver
Supplier quality
Focus on core competencies
Customer service
How can you learn to identify qualitative factors:
Classroom problems
“Real world” decisions
Chapter 4

9. Uncertainties Examples of uncertainties in non-routine decisions:
Revenue and cost estimates
Interpreting quantitative results
Relevant range of operations
Qualitative factors
Dependence among product lines
Alternative uses for capacity
Why is it important to consider uncertainties?
How can you learn to identify uncertainties?
Chapter 4

10. Exercise: Constrained Resources
Chapter 4

11. Product Mix and Constrained Resources
Chapter 4

12. Multiple Constraints: Using Solver
Chapter 4

13. Linear Programming Solution Using Solver
Determine the contribution margin for each product and create the objective (target) function to be maximized
List the amount of constrained resources required per product and the total amount of constrained resources available; Create formulas for the resource constraints
Set up an Excel spreadsheet
Use Excel Solver to maximize the objective function
Interpret the Solver output
Chapter 4