This document discusses concepts related to tactical decision making, including relevant vs irrelevant costs, marginal analysis, incentive pay, and multiple choice questions testing understanding of these concepts. Relevant costs change with decisions while irrelevant costs do not. Marginal analysis compares marginal revenue and marginal cost to determine the optimal quantity to produce. Incentive pay can motivate higher productivity but may compromise quality if based solely on speed or quantity.
Why Is That The Work-Force Participation Rate in Rural Areas Is More Than in Urban Areas, But The Level of Economic Development Is Lower in Rural Areas Than in Urban Areas - BSc@gipe
This document discusses concepts related to tactical decision making, including relevant vs irrelevant costs, marginal analysis, incentive pay, and multiple choice questions testing understanding of these concepts. Relevant costs change with decisions while irrelevant costs do not. Marginal analysis compares marginal revenue and marginal cost to determine the optimal quantity to produce. Incentive pay can motivate higher productivity but may compromise quality if based solely on speed or quantity.
This document discusses concepts related to tactical decision making, including relevant vs irrelevant costs, marginal analysis, incentive pay, and multiple choice questions testing understanding of these concepts. Relevant costs change with decisions while irrelevant costs do not. Marginal analysis compares marginal revenue and marginal cost to determine the optimal quantity to produce. Incentive pay can motivate higher productivity but may compromise quality if based solely on speed or quantity.
This document discusses concepts related to tactical decision making, including relevant vs irrelevant costs, marginal analysis, incentive pay, and multiple choice questions testing understanding of these concepts. Relevant costs change with decisions while irrelevant costs do not. Marginal analysis compares marginal revenue and marginal cost to determine the optimal quantity to produce. Incentive pay can motivate higher productivity but may compromise quality if based solely on speed or quantity.
Relevant Cost vs Irrelevant Cost Relevant costs are cost that changes depending on the decision, it behaves like variable cost, the difference is that variable cost depends on the production level while relevant cost depends on the decision. Generally all variable costs are relevant cost. Irrelevant cost are cost that doesn’t change whatever the decision, it behaves like fixed cost. Generally all fixed costs are irrelevant cost. Example: In a company there are 500 employees. The employees union proposes collective negotiation agreement (CNA) whereby air-conditioning units shall only be open 9am-4pm instead of 8am-5pm, this form part of a saving to be distributed as a bonus of P25,000 per employee. Considering the company saves 500 KWh a day which cost P10/KWh because of this agreement and there are 300 working days a year, and basic salary of all employees is P6,250,000.00 should the company agree to the CNA? Accept Reject Bonus 25,000 * 500 = 1,250,000 0 Accept Reject Electricity savings 10*500*300 = 1,500,000 0 Relevant cost: Relevant revenue Irrelevant cost: Accept Reject Basic Salary of Employees 6,250,000 6,250,000 Note that accepting or rejecting the offer will not change the basic salary of the employees. Marginal Analysis Marginal Analysis is an examination of the additional benefits of an activity compared to additional cost incurred by the activity. Marginal analysis compares the Marginal Revenue (MR) and the Marginal Cost (MC). Marginal Revenue (MR) is the additional revenue gained from selling one more unit. Marginal Cost (MC) is the additional cost incurred by producing and selling one more unit. If MR > MC; sell more. If MR < MC; sell less. If MR = MC, you are selling the right amount (maximizing profit) The marginal revenue decreases as the number unit increases this may be due to the quantity discount or bargains. Example: No. of Units Marginal Revenue Marginal Cost 1 5 3 2 4 3 3 3 3 4 2 3 To maximize the profit, the company should sell 3 units of the product, because if the company sells 4 units the marginal revenue would then be 2 which is less than the cost of 3 Sometimes it’s not the marginal revenue that decreases but each additional unit sold would be harder and will cost more, this is true for Advertising Expense. The demand created in advertising a product for the first time is greater than the demand created for the subsequent advertisement. Example: Advertising Expense Additional Customers Cost per new customers P10,000 2,000 5.00 P20,000 3,386 7.21 P40,000 4,773 14.42 P42,000 4,870 20.62 P44,000 4,963 21.51 Cost per new customer = Additional Advertising Expense / Additional Customer Example: 7.21 = (20,000-10,000)/(3,386/2,000) If the Marginal Revenue is 21, the best advertising plan is the P42,000 Presenting the advertising plan in income statement: 10,000 20,000 40,000 42,000 44,000 Marginal Revenue/customer P21 P21 P21 P21 P21 x additional customer 2,000 3,386 4,773 4,870 4,963 Total Marginal Revenue 42,000 71,106 100,233 102,270 104,223 Total Marginal Cost/Adv. Ex. (10,000) (20,000) (40,000) (42,000) (44,000) Marginal Income 32,000 51,106 60,233 60,270 60,223
Deciding between alternatives
Managers often have to decide between competing strategies to achieve the same end. Marginal Analysis could be used to decide which alternatives yield to the highest income Example: There are two movies in a cinema, one movie is an action movie while the other is an horror movie, over advertising one movie will make the other movie under advertise. The cinema only has 100,000 budget on advertising Action Movie Horror Movie Total Viewers Ad Expense # Viewers MC Ad Expense #Viewers MC
P10,000 3,386 2.95 P90,000 3430 63.69 6,816
P20,000 4,197 12.33 P80,000 3273 56.18 7,470 P30,000 4,773 17.36 P70,000 3095 48.54 7,867 P40,000 5,219 22.42 P60,000 2889 41.15 8,108 P50,000 5,584 27.39 P50,000 2646 33.55 8,229 P60,000 5,892 32.46 P40,000 2348 26.11 8,240 P70,000 6,159 37.45 P30,000 1965 18.48 8,124 P80,000 6,394 42.55 P20,000 1424 10.82 7,819 P90,000 6,605 47.39 P10,000 500 20.00 7,105 Advertising expense of 60,000 to Action Movie and 40,000 to horror movie will yield to the most number of viewers. Incentive Pay Payment of incentive encourages hard work. Example: There are two employees, during the month Employee A was able to make 100 units of product Z and Employee B was able to make 50 units of product Z. Both A and B have a fixed salary of 20,000. Next month Employee A only made 60 units of product Z because even if he make 100 units or 60 units he will still earn 20,000 a month. An incentive pay is necessary for those working in production and sales department as more units produce and sold increases income. On the other hand if salaries are mainly incentive based, employee may rush their work sacrificing quality to achieve speed. Going back to the example even if Employee A produces more product than Employee B, due to his speed Employee A might produce more damaged product than Employee B. Legend: AC = Average Cost MC = Marginal cost MR = Marginal Revenue Activity Multiple Choice Questions: 1. When economist speak of “marginal” they mean a. Opportunity b. Scarcity c. Incremental d. Unimportant 2. Managers undertake an investment only if a. Marginal benefits of the investment are greater that zero b. MCs of the investment are greater than marginal benefits of the investment c. Marginal Benefits are greater than MCs d. Investment decisions do not depend on marginal analysis 3. A firm produces 500 units per week. It hires 20 full-time workers (40 hours/week) at an hourly wage of P15. Raw materials are ordered weekly, and they cost P10 for every unit produced. The weekly cost of the rent payment for the factory is P2,250. How do the overall costs break down? a. Total variable cost is P17,000; total fixed cost is P2,250; and total cost is P19,250. b. Total variable cost is P12,000; total fixed cost is P7,250; and total cost is P19,250. c. Total variable cost is P5,000; total fixed cost is P14,250; and total cost is P19,250. d. Total variable cost is P5,000; total fixed cost is P2,250; and total cost is P7,250. 4. Total costs increase from P1,500 to P1,800 when a firm increases output from 40 to 50 units. Which of the following is true if MC is constant? a. FC = P100 b. FC = P200 c. FC = P300 d. FC = P400 5. A manager of a clothing firm is deciding whether to add another factory in addition to one already in production. The manager would compare a. the total benefits gained from the two factoies to the total cost of running the two factories. b. the incemental benefit expected from the second factory to the total cost of running the two factories. c. the incremental benefit expected from the second factory to the total costs of running the two factories. d. the total benefits gained from the two factories to the incremental costs of running the two factories. 6. the firm is thinking of hiring an additional worker to their organization who can increase total productivity by 100 units a week. The cost of hiring him is 1,500 per week. If the price of each unit is P12. a. the MR of hiring the worker is 1,500. b. the MC of hiring the worker is 1,200 c. the firm should not hire the worker since MR < MC d. all of the above 7. A retailer has to pay P9 per hour to hire 13 workers. If the retailer only needs to hire 12 workers, a wage rate of P7 per hour is sufficient. WHat is the MC of the 13th worker? a. P117 b. P9 c. P33 d. P84 8. If a firm's AC is rising, then a. MC is less than AC b. MC is rising c. MC is greater than AC d. the firm is making an economic profit 9. A company is producing 15,000 units. At this output level, MR is P22 and the MC is P18. The firm sells each unit for P48 and average total cost is P40. What can we conclude from this information? a. The company is making a loss b. The cost needs to cut production c. The company needs to increase production d. Not enough information is provided 10. Food Fanatics caters meals where its cost of producing an extra meal is P25. Each of its meals sells for P20. At this rate, what should the company do? a. Produce more meals and increase its profit b. Produce fewer meals and increase its profit c. Not change production d. None of the Above Problems: 1. You run a game day shuttle service for parking services for the local ball club. Your cost for different customer loads are 1- P30; 2- P32; 3- P35; 4- P38; 5- P42; 6- P48; 7- P57; and 8- P68. What are your MCs for each customer load level? What is the AC? If you are compensated P10 per ride, what customer load would you want? 2. Children in poor neighborhoods have bleak outlooks on life and do not see much gain to studying. A recent experiment is paying children in poor neighborhoods $100 for each A rating they earn in a six- week grading period. How does this affect the children's behavior? 3. Your insurance firm processes claims through its newer, larger, high-tech facility and its older, smaller, low-tech facility. Each month, the high-tech facility handles 10,000 claims, incurs P100,000 fixed costs and P100,000 in variable costs. Each month, the low-tech facility handles 2,000 claims, incurs P16,000 in fixed costs and P24,000 in variable costs. If you anticipate a decrease in the number of claims where will you lay off workers? 4. A copier comapny wants to expand production. It currently has 20 workers who share eight copiers. Two months ago, the firm added two copier, and output increased by 100,000 pages per day. One month ago, it added five workers and productibity also increased by 50,000 pages per day. Copiers cost about twice as much as workers. Would you recommend it hire another employee or buy another copier?
Why Is That The Work-Force Participation Rate in Rural Areas Is More Than in Urban Areas, But The Level of Economic Development Is Lower in Rural Areas Than in Urban Areas - BSc@gipe