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Dear Sir, I would like to ask you some questions about short-term decisions that I came across in the Kaplan kit
1. In the make or buy decision which FOUR of the following are to be correctly included in the consideration?
My answer is:
(i) The amount of re-allocated rent costs caused by using the production space differently
(ii) The variable costs of purchase from the new supplier
(v) The redundancy payments to the supervisor of the product in question
(vi) The saved labour costs of the production staff redirected to the other work
Kaplan’s answer is:
(ii) The variable costs of purchase from the new supplier
(iv) The level of discount available from the new supplier
(v) The redundancy payments to the supervisor of the product in question
(vii) The materials no longer bought to manufacture the product
To be honest, as I have not understood clearly the relevent cost concept, I found all of them sound reasonable to me. Could you explain to me why (i), (vi) are not right? Thank you!
2. Here’s another question
Ace Limited is considering whether or not to cease production of leather-bound diaries.
Which of the following items are valid factors to consider in this decision?
a) The diaries made a loss in the year just passed
b) The diaries made a positive contribution in the year just passes
c) The market outlook in the long term looks very poor
d) The budget for next year shows a loss
e) The business also sells pens and many diary buyers will often also buy a pen
f) The business was founded to produce and sell diaries
Kaplan’s answer is c) and e), but I don’t under stand why e) is true and why f) is wrong.Question 1:
Re-allocating rent costs does not mean that the total payable by the company for rent changes – they still pay the same amount in total, just charge it between products differently. It is only relevant when the total cost to the company changes.
If staff are transferred to other work, then they are still paying the labour. So again, the total amount paid will not change.
Question 2:
If they stop selling diaries then they will sell fewer pens. So they need to take into account the money they will lose from selling fewer pens when deciding whether or not to stop diaries.
The decision should be based on whether they will make more or less money if they stop selling diaries. If diaries are losing money then they should stop selling them (presumably they are selling other products as well). The reason the company was founded is now completely irrelevant.
I do suggest that you watch my free lectures on relevant costing. The lectures are a complete free course for Paper PM and cover everything needed to be able to pass the exam well.
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