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Chapter 19

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Describe and identify information relevant tobusiness decisions

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Define business goals

Identify alternative courses ofaction

Gather and analyze relevantinformation

Compare alternatives

Choose best alternative

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Expected future dataDiffers among alternativesRelevant costs

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Do not affect decisionSunk costs

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Managers need to consider qualitative factors indecision-making

Use same guidelines as relevant costs

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Incremental analysis

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Make special order and pricing decisions

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Is there excesscapacity?

Will the reducedprice cover the

incrementalcosts?

Will special

order affectsales in thelong-run?

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Is there excesscapacity?

?

Considerfurther

?

Reject thespecial order

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Does reducedprice cover

variablecosts?

? Considerfixed costs

? Reject the

special order

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Will regular

customers findout and demanda lower price?

Will special ordercustomer

demand lowerprice on a

regular basis?

Will special orderstart a price war

withcompetitors?

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Expected increase inrevenues

50,000 packs x .37 $18,500

Expected increase invariable costs

50,000 packs x .32 16,000

Expected increase inoperating income

$ 2,500

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ACCEPT

If $5,800 of costs will be incurred,then Active-Cardz should decline.

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What is our

target profit?

How much willcustomers

pay?

Are we aprice-taker ora price-setter?

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Price-takers Price-setters

Product lacksuniquenessIntense competition

Pricing approachemphasizes targetpricing

Product is moreuniqueLess competitionPricing approachemphasizes cost-pluspricing

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Revenue at market priceLess: Desired profitEquals Target full cost

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Includes productand period costs

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Full costPlus: Desired profitEquals Cost-plus price

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DECISION RULE:How to Approach

Pricing?

Is company aprice-taker for the

product?

?

Is company aprice-setter for

the product?

?

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Make dropping a product and product-mixdecisions

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Does the productprovide a positive

contributionmargin?

Will fixed costscontinue?

Can any fixedcosts be avoided

if we drop theproduct?

Will the sales ofother products be

affected?

What could wedo with the freed

capacity?

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Two keys Focus on relevant revenues, costs and profits Use a contribution margin approachFocus now on a decrease in volume

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Product has a negative contribution marginUnavoidable fixed costs are irrelevantAvoidable, direct fixed costs are relevant

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DECISION RULE:Drop a product,

department, or territory?

Are lost revenues >cost savings?

?

Are lost revenues