need monday
David Hwu
YesterdayNov 12 at 1:23pm
When making a large company decision as a name change there are relevant and irrelevant costs associated that would need to be considered. This would include implicit costs, explicit costs, sunk costs, unavoidable costs, and incremental costs. As Douglas (2012), mentions that the relevant cost is the cost that is relative to the decision deigning considered. In this scenario, the changing of the company name from Summer Lawn Care to Lawn and Tree Care has a relevant cost impact. The relevant cost is also considering as incremental cost which is the cost for a current or future period based on a decision to be made. The relevant or incremental, costs to be considered would include costs of changing business signage, change in state and federal organization fees, legal fees associated with changing the name, costs for business cards, website redesign, miscellaneous office expenses, and advertising costs.
For Irrelevant costs, these costs are not relevant to a decision that is going to be made. Irrelevant costs include both unavoidable and sunk costs. Unavoidable costs are contractually obligated to be paid and include management salaries and equipment and facility lease fees (Douglas, 2012).
Sunk cost as Douglas (2012), defines sunk cost are the costs that have been previously incurred and cannot be recovered. Sunk cost the company name change can be the company uniforms, vehicle signage, business cards, and website ads. The difference between sunk costs and unavoidable costs is that sunk costs have already been paid and cannot be recovered. Whereas unavoidable costs have not necessarily been paid yet but will be at some point in time in the future. Sunk costs and unavoidable costs are both considered explicit costs. Explicit costs are actual “out of pocket” payments that have been paid to another individual or business for products or services received.
Now for implicit cost Douglas (2012), defines implicit cost as a cost that reflects a lost opportunity when using a particular resource for another purpose. An example of the implicit cost would be the interest lost on money in a savings account if that money was taken out of the bank and used on capital improvements for a company. An example can be the lost opportunity of the resources used to pay for the company’s name change would be the implicit cost to the company.
Reference:
Douglas, E. (2012). Managerial Economics (1st ed.) [Electronic version]. Retrieved from https://content.ashford.edu/
YesterdayNov 12 at 7:39pm
The partner that wants to change the company name from Summer Lawn Care to Lawn and Tree Care, wants the name to advertise and inform their clients that their services are not just limited to operating in the summer months. The name change could possibly yield more business resulting in higher profits year-round. The second partner that wants to keep the name Summer Lawn Care is reluctant, due to profit loss of having to discard/change already paid for business cards, vehicle paint, signage, and ads in Yellow Pages. These are the company sunk expenses, as they were already purchased/paid.
Sunk expenses are “Earlier paid for purchases of assets such as property, complexes, factory and machines, and depreciation costs based on these” (Douglas, 2012). Although the company has sunk expenses, if they decide to change their name, they may be able to recover some of the expenses. For example, utilizing the previously printed business cards, vehicle paint, signage, and ads in Yellow Pages with the same contact information for both companies, while gradually fading out the Summer Lawn Care name.
The Implicit expenses are the loss of interest income on funds and the depreciation of machinery. Therefore, this expense occurs to operate and maintain the business. With a name change would possibly be beneficial to the company leading to more business and a lot more opportunity expense. Related expenses are also regarded as small expenses that comprise direct labor expenses, supplies, new equipment and variable overhead expenses. Related expenses also comprise opportunity expenses or what would be the ideal substitute for the organization with the resources involved unrelated expenses or non-incremental expenses are the following: managers' wages rent and lease expenses, payments on debt and sunken expenses (Douglas, 2012).
Resource:
Douglas, E. (2012). Managerial Economics (1st ed.). San Diego, CA: Bridgepoint Education.
YesterdayNov 12 at 3:56pm
According to our textbook author Douglas (2012), contribution analysis is described cost-benefit analysis method that confines costs to incremental costs while benefits are linked to incremental revenues that result from a decision being made. The purpose of contribution analysis is to measure the contribution of a decision.
A good example of contribution analysis can in the retail industry, as they can use this analysis to predict or determine if lowering the price on goods or services would result in a positive contribution margin. To determine the contribution margin of a product one would take the price per unit of a product and subtract the average variable cost per unit of a product (Douglas, 2012). For instance, if a company sells 10,000 units of shirts for total revenue of $500,000. The cost of goods sold is $150,000, with a labor expense of $100,000. The contribution margin per shirt is (($5000,000 -$150,000 - $100,000)/10,000) which is $25.00 per shirt.
Another clear example would be in the Information technology sector, where contribution analysis can be used would be determined from an on-premise database solution or migration to cloud technology. For instance, maintaining an on-premise database be costly from the cost of maintenance, hardware, premier services, facility, and HVAC. Comparing those incremental costs to storing data on the cloud where all of the physical hardware and facility costs would be absorbed into the usage cost of cloud services would overall lower the risk and management of an on-premise solution. This would net significant savings resorting to higher revenue.
Reference
Douglas, E. (2012). Managerial Economics (1st ed.) [Electronic version]. Retrieved from https://content.ashford.edu/
YesterdayNov 12 at 9:22pm
Contribution analysis is a form of cost-benefit analysis where the costs are confined to incremental cost and the benefits are confined to incremental revenues (Douglas, 2012). A good example of contribution analysis would be in the retail environment for the purchase of a pair of tennis shoes. Michael Jordan very popular basketball who won Chicago Bulls six champions. Due to his skills and ability to win those championships, he was able to build a brand of tennis shoes he wore during his basketball career. His tennis shoes always sell out the same day he releases them. Say for instance Jordan sells 2000 pairs of tennis shoes in a month and his total revenue made was $600,000. That same month he had $80,000 labor expense and the cost of goods $100,000. By taking the total revenue of ($600,000-$80,000-$100,000/2000)=$210. Jordans knows in order to reach a profit or point of positive rewards, the cheapest he can sell each pair of tennis shoes for would be $210.
It’s important for all organizations to find out their contribution analysis when determining future sales of products. Finding out the least amount for return in a product also determines the positive marginal outcome. Since Jordan brand of shoes sells so quickly, the consumer has to decide if they are going to take it or leave it. Take the tennis shoes and pay the price or leave it and shop with a competitor. Anytime I’m shopping for clothing and apparel one of the first tasks I’m doing is completing price and savings comparison. If I can pay $40 for a pair of shoes compared to $210 I most definitely will and keep the other $170 for later. By organizations reviewing contribution analysis, an organization can decide if production costs are more than expected and if find an alternative supplier to save or continuing using the same supplier for the relationship aspect of it. Either decision way it goes, incremental costs are associated with contribution analysis.
Reference
Douglas, E. (2012). Managerial Economics (1st ed.) [Electronic version]. Retrieved from https://content.ashford.edu/