1. Copyright © 2003 Pearson Education Canada Inc. Slide 11-118 Chapter 11 Decision Making and Relevant Information

2. Copyright © 2003 Pearson Education Canada Inc. Slide 11-119 Information and the Decision Process A decision model is a formal method of making a choice, frequently involving quantitative analysis 5 Steps in the Decision Process Pages 404 - 405 Feedback 1.Gather information 5.Evaluate performance2.Make predictions 3.Choose an alternative 4.Implement the decision

3. Copyright © 2003 Pearson Education Canada Inc. Slide 11-120 Relevant Costs and Revenues Relevant costs are expected future costs that differ across alternative courses of action Relevant revenues are expected future revenues that differ across alternative courses of action Every decision deals with the future Costs incurred in the past are irrelevant these costs are sometimes called sunk costs past costs are only useful in that they may help predict costs in the future Pages 405 - 406

4. Copyright © 2003 Pearson Education Canada Inc. Slide 11-121 Quantitative and Qualitative Information Quantitative factors are outcomes that are measured in numerical terms expected costs, sales revenues and volumes Qualitative factors are outcomes that cannot be measured in numerical terms employee morale, customer satisfaction Pages 406 - 407 Quantitative Information Model Quantitative Information ResultsDecision

5. Copyright © 2003 Pearson Education Canada Inc. Slide 11-122 Typical Relevant Costing Decisions One-Time-Only Special Order (Pricing) Make or Buy Decisions (Outsourcing) Opportunity Costs Product Mix Decisions under Capacity Constraints Add or Drop a Product Line or Customer Equipment Replacement Decisions Pages 407 - 426

6. Copyright © 2003 Pearson Education Canada Inc. Slide 11-123 One-Time-Only Special Order WithoutWith OrderOrderDifference Volume30,00035,0005,000 Relevant revenues$600,000$655,000$55,000 Relevant costs: Variable manufacturing(225,000)(262,500)(37,500) Incremental income$17,500 Pages 407 - 409

7. Copyright © 2003 Pearson Education Canada Inc. Slide 11-124 Outsourcing and Make/Buy Decisions MakeBuyDifference Relevant costs: Outside cost of parts$160,000$160,000 Direct materials $80,000 (80,000) Direct labour 10,000 (10,000) Variable overhead 40,000 (40,000) Fixed purchasing, receiving and setup overhead 20,000 (20,000) Incremental difference In favour of making$10,000 Pages 410 - 413

8. Copyright © 2003 Pearson Education Canada Inc. Slide 11-125 Outsourcing and Opportunity Costs MakeBuy Relevant cost to make$150,000 Relevant cost to buy$160,000 Opportunity cost: Profit forgone because Capacity cannot be used to make another product 25,000 Total relevant costs$175,000$160,000 Pages 413 - 417 Opportunity cost considers the profits lost by not following the next best alternative course of action

9. Copyright © 2003 Pearson Education Canada Inc. Slide 11-126 Product Mix Decisions Under Constraint Pages 417 - 418 SnowmobileBoatEngine Contribution margin per unit$240$375 Machine hours required per unit25 Contribution margin per machine hour$120$75 If machine hours are constrained, maximize income by first producing as many snowmobile engines as can be sold and then shift production to boat engines

10. Copyright © 2003 Pearson Education Canada Inc. Slide 11-127 Customer Profitability Analysis Pages 418 - 422 KeepDrop AccountAccountDifference Relevant revenue$1,200,000$800,000$(400,000) Relevant costs: Cost of goods sold920,000590,000330,000 Material-handling labour92,00059,00033,000 Marketing support30,00020,00010,000 Order/delivery32,00020,00012,000 Decline in operating income if drop account$(15,000)

11. Copyright © 2003 Pearson Education Canada Inc. Slide 11-128 Irrelevance of Past Costs Pages 422 - 426 Costs incurred in the past are sunk (irrelevant) Only expected future costs and revenues are relevant Example: Consider replacing an old machine with a new machine with expected lower operating costs Keep OldBuy NewDifference Relevant costs: Operating costs$1,600,000$920,000$680,000 Disposal value of Old machine(40,000)40,000 Cost of new machine600,000(600,000) Difference $40,000

12. Copyright © 2003 Pearson Education Canada Inc. Slide 11-129 Linear Programming Optimization technique used to maximize total contribution margin given multiple constraints Pages 427 - 431 Objective function: Total contribution margin = $240S + $375B Constraints: Assembly department2S + 5B < 600 Testing department1S + 0.5B < 120 Material shortageB < 110 Negative impossibilityS > 0 and B > 0

13. Copyright © 2003 Pearson Education Canada Inc. Slide 11-130 Feasible Solutions Linear Programming Solution Pages 427 - 431 0 50 100 150 200 250 300 Snowmobile Engines (S) Boat Engines (B) 250 200 150 100 50 0 Testing Department Constraint Material Shortage Constraint Assembly Department Constraint Optimal Corner 5S, 90B