Pretend you are again a manager of Volkswagen Groupmanufacturing company. You have been asked to determine whether aproduct (one of your choosing) should be manufactured in-house oroutsourced to another vendor.
Discuss the relevant costs you would consider for this decisionas well as irrelevant costs and sunk costs. How would you usedifferential analysis to arrive at this decision? Are there anyother items that should be considered when making thisdecision?
Pretend you are again a manager of Volkswagen Groupmanufacturing company. You have been asked to determine whether aproduct (one of your choosing) should be manufactured in-house oroutsourced to another vendor.
Discuss the relevant costs you would consider for this decisionas well as irrelevant costs and sunk costs. How would you usedifferential analysis to arrive at this decision? Are there anyother items that should be considered when making thisdecision?
Related questions
Tactical decision making
Tactical decision making means choosing among alternatives withan immediate or limited end in view. For example, a company mayaccept a special order for less than the normal selling price touse idle capacity. Tactical decisions tend to be short-runin nature; however, it should be emphasized that short-rundecisions often have long-run consequences. A general tacticaldecision-making model is outlined here.
| 1. | Recognize and define theproblem. |
| 2. | Identify possible alternativesolutions to the problem, and eliminate any unfeasiblealternatives. |
| 3. | Identify the costs and benefitsassociated with each feasible alternative. Eliminate the costs andbenefits that are not relevant to the decision. |
| 4. | Compare the relevant costsand benefits for each alternative. |
| 5. | Assess qualitative factors. |
| 6. | Select the alternative with thegreatest overall benefit. |
Identifying and comparing relevant costs and revenues is theheart of the tactical decision model. Relevant costs (revenues) arefuture costs (revenues) that differ across alternatives. (Revenuesare treated in the same way as costs, so we will simplify thediscussion by referring to costs.) All decisions relate to thefuture; so, only future costs can be relevant. In addition, thecost must differ from one alternative to another. If a future costis the same for more than one alternative, it has no effect on thedecision. Such a cost is an irrelevant cost.
Assume that Reeves Company is considering accepting a specialorder for $25 per unit when the normal selling price is $30 perunit. Reeves has enough excess capacity to make the order withoutdisplacing normal sales. The alternatives facing Reeves Company are(Select "Yes" for the statements that are applicable and "No" forthe items that do not apply):
| Accept the special order. | - Select your answer -YesNoItem1 |
| Reject the special order. | - Select your answer -YesNoItem2 |
| Sell normal sales for $25 perunit. | - Select your answer -YesNoItem3 |
Choose which of the following are relevant in deciding whetheror not to accept the special order. (Select "Yes" for thestatements that are applicable and "No" for the items that do notapply)
| $25 price. | - Select your answer -YesNoItem4 |
| $30 normal price. | - Select your answer -YesNoItem5 |
| Variable cost of making the unitsin the special order. | - Select your answer -YesNoItem6 |
| Depreciation on factory equipmentused in making the special order units. | - Select your answer -YesNoItem7 |
| Increased property taxes on thefactory building which are due while the special order would bemade. | - Select your answer -YesNoItem8 |
While cost and revenue information is important, otherinformation may be needed to make an informed decision. Thesenon-financial factors are termed qualitative and are often relevantin decision making. For example, in deciding whether to make acomponent in-house or purchase it from an outside supplier, thecompany may consider any difference in quality or in responsivenessto the company's production schedules.
