Introduction and description of scenarios
When a company faces a situation in which various types of options and conditions are put forth for selection, this is called decision-making. The process of coming to a decision regarding a subject may be commenced through either logical verification or commonsensical conjectures where the companies, as well as their managerial departments, take risks being unaware of what the results or consequences might happen in the end. In the case of contracts and sub-contract of supplying certain materials or components, the process of decision-making is followed. It has been a practice to outsource for the purposes of reducing costs as well. However, this increases dependence on contractors and reduces to some extent their control on the quality of the components. The last factor is a great risk to the company’s status and wellbeing. The opportunity cost approach to this type, which is obtained from alternative uses of the productive capacity, is released as the result of the subcontracting making of the components.
As a matter of fact, this is a case of outsourcing where relevant costs analysis is carried out. Outsourcing is the ordering of goods or labor from outside the vendor manufacturing plant. In such a case, the company is intending to outsource the production of 3000 containers from the Storm Containers rather than producing internally or contracting the Storm Containers’ to repair the existing ones. The options available to the company do nothing and continue operating within the current situation. It means, buys at ÂŁ300,000, or carry out repair work on old containers at ÂŁ 87,500. Non-financial factors will be also considered as the necessary ones dealing with this issue.
Discussion of costs to be included or excluded
Costs influences price because they affect supply. The lower the costs of producing a product relative to the price customers pay for it is, the greater the quantity of a product the company is willing to supply is. Managers who understand the cost of producing their companies’ products set prices that make the products attractive to the customers while maximizing their companies’ operating incomes. In computing the relevant costs for a pricing decision, the managers must consider relevant costs according to their true value.
Surveys of how managers make pricing reveal that companies weigh customers, competitors and cost differently. Companies selling similar commodity-type products as what, rice and Soya beans in highly competitive markets have no control over setting prices and must accept the price determined by a market consisting of many participants. Cost information only helps the company decide on the output level that maximizes its operating income. In less competitive, such as for cameras and cellular phones, products are differentiated and all three factors affect prices; the value customers place on a product and the prices charged for competing products affect demand and the costs of producing and delivering the product influence supply. As competition lessens, even more, the key factor affecting decisions is the customers’ willingness to pay, not costs or competitors.
In order to reach a decision in relation to the contracting or producing in-house of the containers, the company shall analyze the relevant costs, which will be incurred by contracting, and the costs, which will be incurred by producing. In the analysis, in this case, we shall consider relevant costs only.
Considering the possibility that the firm contacts the supply of the containers, the productive capacity released as a result will remain idle. The following is the calculation of the 3,000 units that will be incurred.
The lowest cost among the three that is production, contracting, and repair is ÂŁ113,750 for repairs after taking into consideration all relevant costs. It is expensive for the company to outsource and produce this product at a cost of ÂŁ216,250 and ÂŁ313,250 respectively. This is after considering two expenses general company overhead and supervisory labor as a fixed overhead, which will be, incurred either way. Direct material costs a varying with the units of the product. Direct manufacturing labor costs a varying with direct manufacturing labor-hours; and Ordering and receiving, testing and inspection and rework costs a varying with their respective cost drivers. For example, ordering and receiving costs vary with the number of orders. Staff members responsible for placing orders can be reassigned or laid off in the long –run if fewer orders need to be placed, or the number of staff members can be increased in the long run to process more orders. Direct machining costs, such as rental charges, do not vary with machine hours over its time horizon, so they are fixed in the long run. The manager’s salary will be incurred whether the product is in-house or outsourced but will be reduced to 30,000 for repair work. This makes it a fixed cost. The allocated fixed costs are irrelevant to the decision since they are not affected, and will continue to be incurred by the company irrespective of whether the parts are made or contacted. In the examples, which we have examined so far, the selection of alternative courses of action has been made on the basis of seeking the most profitable result. Business enterprises are limited in the pursuit of profit by the fact that they have limited resources at their disposal, so that quite apart from the limitation on the quantities of any product, which the market will buy at a given price, the firm has its own constraints on the volume of output. Hence, at a given price, which may be well above costs of production, the firm may b unable to increase its overall profit simply due to its inability to increase its output.
Other considerations, other than financial in this case
A certain quality of a product is of great importance because this is a variable, which bears a direct influence on the size of the demand. This is particularly so under conditions of intensive competition where other marketing strategies, such as a decreased price, maybe perceived easily and then followed by competitors. The decisions concerning the determination of the type containers to use require that the decision-maker be aware of the various dimensions of the elements of the product component as well as of the functional relationship each one displays with demand. Taking into consideration the cost implications, the alternatives per product element, as well as the order to establish the most effective combination.
The limiting factors, which affect the level of production, may arise out of shortages of labor, material, equipment, and factory space to mention but a few obvious examples. Faced with limiting factors of whatever nature, the firm will wish to obtain the maximum profit from the use of the resources available, and in making decisions about the allocation of resources between competing alternatives, management will be guided by the relative competing alternatives, management will be guided by the relative contribution margins, which they offer. Since the firm will be faced with limiting factors, however, the contribution margins must be calculated not in terms of units of product sold which fail to reflect constraints on the total volume of output but should be related to the unit of quantity of the most limiting factor.
Contracting has its own risks such as the company that is going to produce may compromise quality thus affecting the input. They may also increase the price as well as affect delivery time. The only operation available in that case is to enter into a long-term contractual agreement if they agree to produce a price, which is, lowers than 338. The company should also enter into strategic alliances with suppliers in order to ensure production is ongoing without a hitch (Wagner, 82).
It is claimed that contribution is more relevant to management in tendering than are costs prepared with loading for the fixed expense. It is pointed out that the loading must, of necessity, vary with the level of output considered. This implies that when trade is bad and the level of output is considered. This implies that when trade is bad and output small and attempt to recover all fixed overhead will result in an uncompetitive price. It is accordingly claimed that in practice many opportunities exist for obtaining fixed expenses and that therefore a contract so obtained will result in a greater overall net profit than if the contract was not obtained. There are of course dangers in this view and these are dealt with later, subject to the dangers, there is little doubt that the approach is of value to businesspersons, as it deals with the common business situation of a manufacturer desiring to maximize his profit in the knowledge
From the point of view of a decision-maker the reliability in the execution of the order cycle is just as important, if not more so, as its absolute length. There is no sense in contracting a supplier that the average cycle is 5 days whilst its dispersion may in fact vary between one day and 20 days. Although the average may indeed be five days, it is certainly not typical and the decision-maker cannot depend on it. The supplier who renders a reliable product will thus have an advantage over others who do not. This would however require strict control over the input activities and the related costs must once again be weighed against the additional benefits high may be stimulated. In an endeavor to ensure a reliable service suppliers usually develop certain standards against which performance may be evaluated.
Condition of delivered goods- A well-planned system is of little value if the goods are delivered in damaged condition. In fact, the advantages to both the manufacturer and the customer of a short and reliable order cycle disappear when the delivered goods cannot be utilized or sold or if they must first be repaired. The cost of delivering goods in a perfect condition tends to be less than the sum of the cost of a less efficient system plus the direct cost due to damage and the probable cost of lost sales. The manufacturer will thus endeavor to deliver merchandise in a good condition. Once inventory holding nature of the warehouse and the mode of transport, which is used.
Recommendations, taking into account financial and non-financial issues
Since the relevant costs of making are less than the costs of buying the firm, should reject the contract and take the repair contract in the short-run. The price of a product or service depends on the demand and supply for it. Three influences on demand and supply are customers, competitors, and costs. Customers influence price through their effect on the demand for a product or service. Companies must always examine pricing decisions through the eyes of their customers. Too high a price may cause customers to reject a company’s product and choose competing or substitute products.
No business operates in a vacuum. Companies must always be aware of the actions of their competitors. At one extreme, alternative or substitute products of competitors can affect demand and force a company to lower its prices. At the other extreme, a company without a competitor can set higher prices. When there are competitors, knowledge of rivals’ technology, plant capacity and operating policies enable a company to estimate its competitor’s cost-valuable information in setting its own prices. Because competition spans international borders, costs and pricing decisions are also affected by fluctuations in the exchange rates between different countries’ currencies. For example, if the yen weakens against the U.S dollar, Japanese products become cheaper for American consumers and consequently, more competitive in U.S markets.
Short-run pricing decisions typically have a time horizon of less than one year and include decisions such as (a) pricing a one-time-only special order with no long-run implications and (b) adjusting product mix and output volume in a competitive market.
Long-run pricing decisions involve a time horizon of one year or longer and include pricing a product in a major market where there is some leeway in setting price. Two key differences affect pricing for the long run versus the short run: costs that are often irrelevant for short-run pricing decisions, such as fixed costs can be altered in the end; and profit margins in long-run pricing decisions are often set to earn a reasonable return on investment. Short-run pricing is more opportunistic-prices are decreased when demand is weak and increased when demand is strong.
Short pricing decisions are responses to short-run demand and supply conditions, but they cannot form the basis of a long-run relationship with customers. Long-run pricing is a strategic decision. A stable price reduces the need for continuous monitoring of suppliers’ prices, improves planning, desired long-run buyer-seller relationships. However, to charge a stable price, learn, and earn the desired long-run return, a company must know damage its costs, over the long run supplying product to customers. This is because the company will consider various other issues which in my opinion may have an impact on the financial performance of the company and therefore they need to be looked upon before accepting this contract.
One would also like to consider the spare capacity they have for producing a container and the possible improvement of container quality. If the company is already operating at full capacity or close to it; the acceptance of the new order will require the stoppage of production of other products, which may have an impact on the profitability of the company. In addition, I would like to make sure that the company will not incur any further or new fixed costs after agreeing to produce the new product. However, in cases where the production of Product C requires the hiring of specialized staff or the purchase of new equipment solely for manufacturing the new product, it would not be favorable for the company to accept the new order. This decision is because the new product is not of such a type that can be demanded by other customers also, which means the company will have to incur fixed costs, if there are any, for meeting the demands of a single customer only. Therefore, it would be rather a losing situation for the company if the new order is accepted under these circumstances.
In the end, I would also take into account whether the request by the customer for the new order is demanded up to a particular period or the demand is placed for a longer period. If the demand is for a shorter period, it would be unfavorable for the company to accept this order. If any of the above-mentioned conditions exist, I would not accept this new order as it will not be profitable for the company.
Bibliography
Wagner, David. Activity-Based Costing and Its Later Development into Activity-Based Budgeting and Management. Seminar Paper. Bristol Business School (the University of the West of England), 2008. Munich: GRIN Verlag, 2010. Print.