investigate potential outcome from course of action

Investigation of scenarios

ID crucial variables
Sensitivity analysis
ID unexpected threaths
ID combination of circumstances -> success

Approx. compare with competitors

info from annual reports
Benchmarking
find/use info for strategic advantage
Unlikely to reveal how to get comp advantage

ROI - Return On Invest

RONA - Return On Net Asset

Best alt to foregone ROCE - Return On Capital Employed

opportunity cost Module 6 A Id potential weakness reduce amount of info ROTA - Return On Total Asset
balance/ trade off NPV & RISK
Value Added
Does not vary with output
Fixed EPS - Earnings Per Share
Irrelevant
Gearing Ratio
Already taken
Sunk cost retained earnings
not recoverable - irrelevant Costs
to keep flexibility
equity issue
vary with output Cost types
Accounting ratios 3 sources Availability constrains strategic capabilities?
Finance - future resource allocation
(no of workers x wage rate) + (units of take advantage of opportunity
capital x price) + (units of material x price) No optimal ratio
= outlay Variable loans
relevant
outlay / output
= unit cost Historic cost?
replacement cost?
Asset valuation
marginal cost vary Current book value?
productivity vary Accounting - efficiency of past allocation problems
CBU inflation adjusted?
optimum allocation Diminishing marginal product
leased?
marginal prod 1 = marginal prod 2 allocation of resources Which assets
Factors determining cost
competing SBU's
Internal analysis Cost & profit
Time to recover startup cost
compare MC with MR economist MC Payback period
MC vs AC alt - discounted payback
all cost must be considered accountants AC

historical cost only guidance fixed cost / net contribution per unit
economist exclude sunk cost break even =
Production cost
future vs historical cost break even analysis
otherwise biased view concentrate on volume output
accountant incl. all historical cost
focus on factors affecting pot. total sales
What external factors affect cost?

marginal cost
e.g. work & input cost of one more unit
"impossible" to disentangle input relevant cost

Joint production Marginal analysis MR= sales price of one more

allocated cost
Activity Based Costing (ABC) price > maginal cost - keep producing revenue maximising
maybe irrelevant in decision making Right price
market knowledge

what are additional expected cost?

Framework Average Cost reduced with volume output
What are additional expected return Profit maximisation
MR = MC econ of scale first mover advantage
significant in some industries
market leader advantage

Economies of scale Experience curve Average Cost reduced from output to date
experience curve effect decline with time
learning
first mover advantage
Combination gives first mover advantage in new markets

share inputs
good reputation
Reduced unit cost with no of products
R & D spill over effects
Economies of scope coordinated strategy
~ synergy
but more often diseconomies
diversification success

Mod 6a.mmap - 30/11/2011 - Rev. 13 - - prepared by Carl Olav Staff / Rune Fjellvang
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