AMITABHA MAHESHWARI

FACULTY(FINANCE)
INC BHAVNAGAR
OBJECTIVE
To Understand:
Nature of Managerial Decision Making(SESSION-1)
Characteristics of Costs for Decision-Making(SESSION-2)
Alternative Choice Decisions(SESSION-3&4)
UNDER IT WE WILL DISCUSS
DECISION TO MAKE OR BUY
DECISION TO ACCEPT A SPECIAL ORDER
DECISION TO CONTINUE OR DROP A PRODUCT LINE
DECISION REGARDING EQUIPMENT REPLACEMENT
DECISION REGARDING CONSTRUCTION OF FACILITIES
DECISION REGARDING SELLING OR FURTHER PROCESSING
AND OTHER ASPECTS



DECISION TO MAKE OR BUY

A firm that is presently buying a product or part from
outside may consider to manufacture that product or part
in the firm itself.

A firm manufacturing a product in its factory and may be
considering purchasing the same from an outside supplier.
When is make and buy decision is required
DECISION TO MAKE OR BUY

A company manufactures a wide range of parts and also
buys many parts from external suppliers. One of the part
No. 101 The monthly requirement of this part is 1,000
units and the standard cost for one unit is:
Rs.
Direct material 40.00
Direct labor 20.00
Variable manufacturing overhead 20.00
Fixed manufacturing overhead 35.00
115.00
DECISION TO MAKE OR BUY
Materials manager suggested that the company could
save money if it was purchased from an outside
supplier willing to supply the quantity required by
Zenith at Rs. 100 per unit. He estimated that if the
part is bought from outside, the fixed clerical cost
would increase that if part is bought from outside,
the fixed clerical cost would increase by Rs. 1,500
and the variable handling cost would be Rs. 5 per
unit. The plant manager reported that if the
manufacture of Part No.101 were discontinued there
would be no change in fixed manufacturing
overheads.
DECISION TO MAKE OR BUY
Solution:- Under total cost approach
Make Buy
Direct material 40,000
Direct Labor 20,000
Variable Manufacturing overhead 20,000
Fixed manufacturing overhead 35,000
Buy decision
Purchase cost 1,00,000
Handling cost 5,000
Clerical cost 1,500
Fixed manufacturing overhead 35,000
1,15,000 1,41,500
DECISION TO MAKE OR BUY
Solution :-Under incremental approach
Make Buy

Direct material 40,000
Direct Labor 20,000
Variable Manufacturing overhead 20,000
Buy decision
Purchase cost 1,00,000
Handling cost 5,000
Clerical cost 1,500
80,000 1,06,500
Decision:- Here make cot is less then to buy, the company should
continue to manufacture Part No. 101.

DECISION TO MAKE OR BUY

Other aspects that should be taken into account while
making a decision of this kind are:

Value of facilities that would be released if the part is not
manufactured,
Reliability of the external supplier,
Control over the quality of the external supplier,
Difficulty in retrenching or using labor for some other
purpose if manufacture of the part is discontinued.


Decision to accept a Special Order
Special orders or one-time orders often have different
characteristics than recurring orders.

Order should be evaluated based on costs relevant to the situation
and the goals of the company.

Other factors influencing special-order pricing decisions may be;
effect on regular customers and special order customers turning
regular customers.

Decision to accept a Special Order
Q.N.-2 Crisp chocolate company is Operating at only of 60%
of capacity due to slow holiday season sales. a social
service organization approaches the company with a
proposal that company produce 10,00,000 chocolate bars
of 25 gms to be sold for Rs.1 by members of the social
service organization to raise money for poor students. The
proposal call for a Rs.0.55 purchase price per bar for the
social service concern. The chocolate bar can be produced
with the firms current excess capacity. The firms chief
accountant prepares the following cost estimates
associated with the production and sale of the chocolate
bars.
Decision to accept a Special Order
Total cost(Rs.) Unit Cost(Rs.)
Direct materials 2,50,000 0.25
Direct labor 1,00,000 0.10
Manufacturing overhead 2,50,000 0.25
(60% is allocated fixed overhead )
Variable selling and
administrative cost 50,000 0.05
6,50,000 0.65



Decision to accept a Special Order
Solution:-
Rs.
Direct Materials 0.25
Direct labor 0.10
Variable manufacturing Overhead(40%) 0.10
Variable Selling and Administration cost 0.05
Incremental cost 0.50
Sales price 0.55
Incremental Profit 0.05
Decision:-We see that accepting the order adds Rs. 0.05
per bar or Rs.50,000 in total, to Crisp Chocolates profit.
Decision to Continue or Drop a Product line
Decision concerning the discontinuation of a
product should consider;
Complementary/competitive nature of the products
of the company
Impact on the image of the company
Effect on the motivation of the employees
Value of resources released on discontinuation




Decision Regarding Equipment
Replacement
Important decision involving alternative
choices is whether or not to buy new capital
equipment.

Economic advantage offered by the
investment is the realization of operating cost
savings which are translated into increased net
profit.

Decision Regarding Construction of
facilities
Decision to replace or addition to the equipment has
been taken, the company might be in a position to
construct its own facilities apart from the possibility of
getting the same thing done from outside sources.

While taking this decision, no attempt must be made
to spread total manufacturing overheads over regular
business operations as well as the new project.

Decision Regarding Selling or
Further Processing
Whether an item is to be sold at an intermediate stage
or whether it should be processed further and sold as a
finished product is another decision that managers are
forced to make.

Where further processing entails additional facilities, a
capital investment decision is required, but if facilities
and spare capacity already exist,

Decision Regarding Selling or
Further Processing
OTHER ASPECTS

Technical know-how and skill of the firm to process
the product further
Additional working capital requirements as a
consequence of further processing
Flexibility in hiring and retrenching people
Marketing set-up for distributing the finished product

Decisions Facing Management
Role of cost in decision making
Relevant costs
Contribution approach in decision making
Relevance and cost behavior
Short-term and long-term implications of decisions
Opportunity costs in Decision making

Your Client has recently leased facilities for manufacturing a
new product. Based on studies made by his staff, the
following data have been made available to you:
Estimated annual sales 24,000 Units
Estimated Costs Rs.
Material 96,000
Overheads (Fixed) 24,000
Adm. Expenses (Fixed) 28,800
Selling Expenses are expected to be 15% of sales and profit is
expected to be 1.02 per unit. Find out selling price per unit and
B.E.P.

Its
New
Beginning
Now
Thanks