Q1: What is the process for making nonroutine operating decisions?
Choose the alternative that maximizes profits (subject to qualitative considerations). This general rule can be made more specific once the nature of the decision at hand is identified. The process for making nonroutine operating decisions is:
+ Identify the type of decision to be made
+Identify the relevant quantitative analysis technique(s)
+Apply the relevant quantitative analysis technique(s)
-Identify the variables that are required as input, and which are known vs unknown
-Estimate the unknown input variables
-Apply the general rule
-Interpret the results, taking the quality of information into consideration
+Identify and analyze the qualitative factors
How are decisons made to accept, reject, and price special orders?
The decision is based on whether there is sufficent capacity to produce the order. If there is enough capacity, the order should be accepted if price is higher than costs.
For special orders what factors need to be determined?
The price for the order, so price exceeds the relevant costs
For special orders, which costs are relevant and which are not relevant?
Often variable costs are relevant and fixed costs are not relevant.
When there is not enough idle capacity to produce an order, it can be accepted only by replacing regular business. What are the opportunity costs and where do they added into?
The opportunity cost of accepting the special order must be included as part of the relevant costs.
In making a decision to accept or reject an order, how is the opportunity cost calculated?
The opportunity cost of a lost unit of regular business is the contribution margin per unit that is regular business would have provided.
1. True or False?
Fixed costs are always irrelevant in nonroutine decision making.
2. True or False?
Avoidable costs are always relevant in nonroutine decisions.
3. True or False?
When a company is operating at capacity, the minimum acceptable price for a customer’s special order is equal to the relevant variable and fixed costs associated with producing the order.
4. True or False?
In a make or buy decision, the relevant cost to make the subcomponent is the sum of the variable and fixed costs that will be avoided if the component is purchased, plus the opportunity costs associated with not releasing the capacity for other uses.
5. True or False?
Any business segment that has a negative contribution margin should be dropped.
6. True or False?
Any business segment that has a negative operating income should be dropped.
7. True or False?
Opportunity costs are always relevant in nonroutine decision making.
8. True or False?
For a company with sufficient excess capacity to produce a customer’s special order, the opportunity cost of accepting the special order is zero.
9. True or False?
For a company without sufficient excess capacity to produce a customer’s special order, the opportunity cost of the special order is equal to the contribution margin per unit of regular business times the number of units of regular business that will be replaced.
10. True or False?
Variable costs are always relevant when making nonroutine decisions.
1. True or False?
The qualitative information in a decision may override the quantitative analysis.
2. True or False?
The shadow price is the same thing as the contribution margin per unit of the constrained resource.
3. True or False?
The shadow price for a resource that has a slack constraint is zero.
4. True or False?
In all product emphasis/constrained resource decisions the company should make the product with the highest contribution margin per unit.
5. True or False?
In a product emphasis/constrained resource decision with unlimited customer demand and one constrained resource, it will always be optimal to produce only one product.
6. True or False?
In a product emphasis/constrained resource decision with limited customer demand and one constrained resource, it will always be optimal to produce more than one product.
7. True or False?
In a product emphasis/constrained resource decision with two products and four constrained resources, the problem can be solved by graphing the constraints.
8. True or False?
The quality of information used for nonroutine decisions is most likely higher than the quality of information used for routine decisions.
F
The information gathering process for routine decisions is likely to be more
reliable than for nonroutine decisions because of the frequency of routine
decisions.
9. True or False?
Sensitivity analysis is used to see how the changes in the input data for a decision might change the results of the quantitative analysis.
T
10. True or False?
Since the quality of the decision-making process is reduced by decision-maker bias, all persons with a stake in the decision should be removed from the process.
Persons with a stake in the decision are likely to have much of the necessary information so they most likely cannot be removed from the process.
