Download Relevant Costs and Revenues

8
Relevant Information
and Decision Making:
Marketing Decisions
© 2007 Pearson Education Canada
Slide 8-1
Relevant Costs and Revenues
Relevant Costs or Revenues
• The predicted future costs or future revenues
that differ among the alternatives being
considered
• Historical costs are not by themselves relevant;
historical data are useful only in that they may
help predict future events
• Examples: special sales orders, deleting /
adding products or departments, optimal use of
limited resources, make of buy decisions, sell or
process further decisions
© 2007 Pearson Education Canada
Slide 8-2
Accuracy and Relevance
• Ideally one would like relevant and accurate
information
• However decision makers must weigh the
extra cost of obtaining more accurate
information, against the benefit which the
increased accuracy offers
© 2007 Pearson Education Canada
Slide 8-3
Decision Process
and Role of Information
Historical
Information
Other
Information
Prediction
Method
Use the information as
a basis for predicting
the future
Decision
Model
Make a decision based on the
quantitative and qualitative
information
Implementation
&
Evaluation
Chosen action is implemented
and evaluation of performance
is main source of feedback
Feedback
© 2007 Pearson Education Canada
Collect relevant
information
Slide 8-4
Special Sales Order
• special one-time order from a customer at a reduced
price
With
Special Order
Relevant revenue:
100,000 @ $13.00
Relevant costs:
100,000 @ $12.00
Incremental income
© 2007 Pearson Education Canada
No
Special Order
$1,300,000
$0
(1,200,000)
$100,000
0
$0
Slide 8-5
Deleting or Adding Products or
Departments
• special decision to add or delete a product line or
department
Keep
Grocery
Relevant revenue:
$1,900
Relevant costs:
Variable costs
1,420
Fixed costs (avoidable)
265
Incremental income
$215
© 2007 Pearson Education Canada
Drop
Grocery
Difference
$1,000
$900
800
150
$50
620
115
$165
Slide 8-6
Optimal Use of Limited Resources
•
•
•
•
when something constrains or limits operations
labour hours, machine hours, raw material, space
determine contribution margin per the limiting factor
allocate usage to maximum profit
Contribution margin per unit
Units per hour
Contribution margin per hour
Silver
$12.00
30
$360.00
Gold
$27.00
10
$270.00
• allocate capacity to “Silver” up to expected demand, and
then allocate remaining capacity to “Gold”
© 2007 Pearson Education Canada
Slide 8-7
Pricing Decisions
Price is a function of
• cost
• elasticity of demand
• competitors actions
• marketing considerations
• business strategy
When relating cost to price always consider the
diversity in costs among the various products
Contribution
Approach
Variable
Costs
Absorption
Approach
Variable
Costs
© 2007 Pearson Education Canada
Mark-Up
52.67%
Fixed
Costs
Mark-Up
5.26%
Slide 8-8
Target Pricing & Target Costing
Traditional Approach
• Determine costs and add on a mark-up to set selling
prices
Costs
+
Mark-Up
=
Price
Target Costing and Target Pricing
• First determine the price at which the product will sell
• Then design a product to be produced at a low enough
cost to provide an adequate profit margin over target cost
Target
Price
© 2007 Pearson Education Canada
-
Target
Costs
=
Margin
Slide 8-9
“Cost-Plus”
• Often the basis for target prices
• The size of the “plus” depends on target (desired)
operating outcomes
• Target prices can be based on a host of different
markups based on a host of different definitions
of cost
• There are many ways to arrive at the same target
price
© 2007 Pearson Education Canada
Slide 8-10