Question

1) When making Managerial decisions, explain what financial and non-financial information is involved in the decision making process?

2) Explain the following concepts utilized in Incremental Analysis--Relevant Costs, Opportunity Costs and Sunk Costs?

3) What is the purpose of incremental analysis used by a company?

4) Why do we only look at relevant costs in accepting or rejecting a special order at a set price? What assumptions are made in this decision-making process?

5) What factors do we look at to determine whether or not to make a product or buy it from someone else?

6) Explain what costs are reviewed in determining whether to sell or process materials further? What decisions rule is used?

7) what considerations are used to determine whether to repair, retain or replace existing equipment?

8) what is the Decision Rule that is utilized in deciding whether to eliminate an unprofitable segment or product?

Answer 1

1.While making Managerial Decisions both the information relating to financial and non financial nature are taken into account. If we consider the financial nature, the cost of holding , salvage value, costs of maintenance, cost of installation etc are considered. If we look at non financial information, its suitability, skill required to operate, useful life, flexibility in case of any requirement etc are observed.

2.Relevant costs:- They are the future costs which differ between alternatives. It may be also defined as the cost which are affected and changed by a decision. Relevant costs are pertinent , and bear upon the decision to be made.

Opportunity costs:-The value of a benefit sacrificed in favor of an alternative course of action is called opportunity cost.The real cost of a resource consumed is the benefit forgone by rejecting the next best alternative use of the same and not historical cost.

Sunk cost:- Normally these are the costs which cannot be normally recovered but can only be reversed if an action is initiated in future years or period.

3.Incremental costs in general will not take into account the sunk costs and any other irrelevant costs in.decision making . It gives importance only to key areas which are useful to the organization and eliminates the unnecessary costs or items.

4.While accepting or rejecting a special order set at price , we only give importance to the relevant costs because the name itself implies that these are the costs that are most relevant to the performance of the task which will take a lead when compared to others.Hence , it is justified.

5.Make or buy decisions not only involve the present costs but also the future projections.The future projection costs may result from capacity levels, trade secrets, product quality, seasonal sales and updations in technology and fluctuations in production etc.Even an emphasis is laid in factors such as limiting factor, computations of minimum volume etc.

6.When it comes to decide whether to sell or further process , few costs are reviewed for the same such as, further cost of processing, other relevant costs associated with further processing, storage or handling costs, overhead costs , etc are evaluated.

7.When we are in a situation to decide whether to repair, retain or replace an existing equipment, we have to observe certain aspects such as costs to be met for repairs and additional benefit derived from such a repair, if we retain the equipment the useful life and further benefit's which may be drawn and expenses to be met I.e, say handling costs, if we replace it ,then, the cost of replacement any further benifit by replacing etc have to be considered.

8.The decision rule to be adopted while deciding whether to eliminate an unprofitable segment or product must be evaluated by observing some aspects such as the increase in profit when a segment is eliminated, any decrease in costs which are being incurred, the short and long run impact by doing so all these need to be considered.