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The Routines of Decision Making - Math Problem Example
1. Before making a decision the costs of the two alternatives need to be compared and contrasted. The decision must be based only on relevant information. Relevant information includes the predicted future costs and revenues that differ among the alternatives…
2. The maximum purchase price for the pair of bindings is $10.00, as this is the cost of production that differs between the alternatives. In case if the price is higher, the company will be realizing a loss.
3. If the production increases from 10.000 units to 12.500, the fixed costs that change between the alternatives allocated to a pair of skis would be the following: 10.000 / 12.500 = $0.8. The fixed cost of 100.000 should be considered when making the decision, as it does not differ between the alternatives. Since all the rest of the production costs remain unchanged, we can simply add the net change in fixed cost from the total cost of production that varies between the alternatives in order to receive the cost of production for a pair of bindings under the new circumstances: 10.00 + 0.8 = 10.80.
When considering the long run (30,000 sales form by the end of the third year), the fixed overhead that varies between the alternatives per pair of bindings is only $0.33 (10.000/30.000). Under this sales volume the company should produce the bindings itself. ...