Learning Objectives

Qualitative and Quantitative Factors Relevance of an Item of Cost Accept or Reject Special Order Continue Making or Buy Sell or Process Further Optimum Product Mix Retention or Dropping of a Product Line Retention or Closure of an Organizational Segment Temporary Shutdown Pricing Decisions

Quantitative Qualitative (orFactors non-cost) factors - are those which are measurable in -are those which are not measurable interms termsof ofthe themonetary monetaryunit. unit.

In the decision on whether to retain or drop a product line, the choice is based on the contribution margin per unit when the product is being bought and sold and on contribution margin per hour when the product is being produced and sold.

Computation:
Practical capacity Less Capacity reserved for C (10 000 units x 2 hours) Balance Number of units to produced of product B: (10 000 hrs./4 hrs.) 30 000 hours 20 000 10 000 2 500

The optimum product mix must therefore be 10 000 units of product C and 2 500 units of Product B.

When management has to decide on whether a department or branch has to be retained or not, the decision is based on the contribution to absorption of unavoidable costs and expenses. The smaller is the contribution to absorption of unavoidable costs and expenses, the higher is the probability for closure of a department or branch and vice-versa An item of cost is considered unavoidable when it cannot be eliminated with the closure of a segment of an organization.

In the absence of any statement to the contrary, it may be assumed that all costs and expenses directly related to a product or organizational segment are avoidable. The contribution to absorption of unavoidable costs and expenses may be proven by comparing the current operating income with the estimated figure thereof assuming that the department or branch in question is already closed.

Example: The following statements are given on the result of operations of Sunny Corp.:

Sometimes, part of the departmental expenses should notThese directly related to be reflected sales cannot be theas when eliminatedin such management decides to computations retain some any of the before employees and facilities decision is by having them made. transferred to other department/branches.

The End !

Thank You !
Prepared by: JOHN RANDOLF C. CABRERA MNA106/12:30-1:30/MWF