BUS 640 Week 3 Discussion Responses NEEDED

Relevant Costs BUS 640 Week 3 Discussion 1

Two partners own together a small landscaping business in North Carolina, called Summer Lawn Care. They have been specializing in summer grass seeding, installation, and maintenance. Recently, the partners acquired special technology and know-how for winter grass installations and maintenance. They also added a tree cutting service as recent storms in the area had caused demand for this service to soar. One of the partners insists that the name of the business should change to Lawn and Tree Care, so that it better reflects the range of services and, thus, generates more customer interest, and thus contracts. The second partner wants to keep the old name and argues, “We have already paid for business cards, vehicle paint, signage, and ads in Yellow Pages”.  Evaluate the arguments of the two partners. Explain and illustrate their points by identifying the relevant and irrelevant costs for this decision. Guided Response: In 300 words or more, please, provide your response to the above discussion question. Identify all the costs in the decision process, including explicit costs, implicit costs and sunk costs. Respond substantively to at least two of your classmates’ postings. Substantive responses use theory, research, and experience or examples to support ideas and further the class knowledge on the discussion topic.

Respond to Courtney Cooper post

Business partners always have a variety of factors to consider before making any decisions. Whether that be the color of the walls in their business or even the type of tissue they use in the bathrooms, any decision is a joint decision. For this example, Summer Lawn Care established a following, and had branded items that accounted into the company's spending. Once things are in writing and heavily advertised it is difficult and costly to go through rebranding.  The second partner focused on the fact that everything seemed set in stone with the first named and found it unnecessary to rebrand the company for a couple of services.  The post the company has in yellow pages allows consumers to seek their company for services and give referrals based on what they see. If they rebrand, all of the word of mouth advertisement and money that went into producing reputable brand will seemingly go down the toilet.

The first investor wants to change the name to be inclusive of the new additions to the company. It will allow potential clients to expand their expectations from the company and look to them for further services. This investor sees the name change as a necessary risk in order to increase further revenue. In my opinion, I do not believe that the name change will make a drastic difference. A compromise would be to advertise the additional services that will be offered and offer things such as coupons, discounts, and codes, for consumers to utilize on their website or in person. This will create buzz around the company and offer a wider range of consumer base and free advertisement when people write reviews and recommend to family and friends.

The best resolution would be to agree to disagree. Expanding services is a great idea but changing the name is an unnecessary change.

Respond to Shannon Dixon post

When a business considers a change in name there is more than the name to consider such as the costs concepts. In this case the partners must consider all costs that would be involved in the changing of a name. While partner A is under the impression the name change will generate more customers therefore generating more profits, partner B thinks it would be costly and does not seem to think A is considering all the costs included.

The costs that they do not have to consider would be the irrelevant cost which are the unavoidable and sunk costs. Unavoidable costs and sunk costs are those which have to be paid out anyway no matter the decision (Douglas, 2012). These include their salary, any building lease or machinery payments they may be making along with expenses they have paid or will be paying for the already completed business cards, ads, paint & signage.

In changing their name, the costs, they have to include in their decision are relevant costs or incremental costs or costs that will happen during a current or future period based on their decision (Douglas, 2012). If a decision is made to name change these incremental costs can include what it will costs to reprint the business cards, change the signage and ads to reflect the new name.

In this discussion both partners have a valid side. In order to reach a decision, it would be beneficial to do a little work. A contribution analysis is “where the costs are confined to incremental costs and benefits are confined to incremental revenues” (Douglas, 2012). Once they have researched what the probable costs are versus the expected revenue, they can make an informed decision.

 References

Douglas, E. (2012). Managerial Economics (1st ed.). [Electronic Version]

Contribution Analysis BUS 640 Week 3 Discussion 2

Explain what is meant by “contribution analysis”. Carefully define the term and provide examples to illustrate it. Guided Response: Can you think of a recent example where you had to evaluate the incremental costs and benefits of different options in order to make a decision? In 300 words or more, please, provide your response to the above discussion question. Respond substantively to at least two of your classmates’ postings. Substantive responses use theory, research, and experience or examples to support ideas and further the class knowledge on the discussion topic.

Respond to Yasmeen Thompson post

Contribution analysis is a 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 (Douglas, 2012).  The contribution of a decision can be defined “as the excess of incremental revenues over incremental costs, and it is called the contribution because it contributes to the firm’s fixed and unavoidable costs, and also to profits if total revenues are more than total costs” (Douglas, 2012).  Incremental costs are the costs that change because of a decision and incremental revenues are those that are received because of the decision (Douglas, 2012).  The contribution analysis can determine the contribution margin of a product by taking price per unit of a product and subtracting average variable cost per unit of a product (Douglas, 2012).  A contribution analysis could be used by a retailer to determine if lowering the price on a product would still result in a positive contribution margin for that product.

A recent example whereI had to evaluate the incremental costs and benefits of different options in order to make a decision was dealing with my Jeep Wrangler. I have a paid off 2010 Jeep Wrangler with 75,000 miles on the dash. Before gas prices started decreasing, I was thinking about trading  my Jeep in for another vehicle with better gas mileage. As I looked at the incremental costs of owning the Wrangler, they amounted to insurance, occasional maintenance, and fuel costs. Looking at the incremental costs of getting a new vehicle the incremental costs included somewhat higher insurance, occasional maintenance costs, lower fuel costs, and a $300 a month car payment.  The perks of keeping the carI have meant lower insurance rates and no car payments.  While the perks of getting a newer vehicle meant a few fuel costs savings. When comparing my options I observed that  it was cheaper for me to keep my jeep rather then get a new one due to the fact the incremental costs of a new vehicle  was greater than the benefit it would provide me through lower fuel costs. 

References:

Douglas, E. (2012).  Managerial Economics  (1st ed.) [Electronic version]. Retrieved from https://content.ashford.edu/

Respond to Frenchye Bynes post

            In order for businesses to maintain a positive revenue flow there must be a fair assessment of total costs of expenses and overhead and total revenues to produce profits. A perfect analysis for this is the contribution analysis. Douglas (2012) writes, “is a form of cost–benefit analysis where the costs are confined to incremental costs and the benefits are confined to incremental revenues” (Sect 6.1, para 1). The benefit of the contribution analysis is that is focuses on the relevant or variable costs that are involved with managerial decision making. “Specifically, it helps a company understand the contribution of individual business lines or different products by calculating the contribution margin (Links to an external site.) of each in terms of dollars and percentage” ( Borad, S. 2019). 

             An example of how this would work would be seen in the selling prices set for products. Let’s take a set of makeup brushes and use an analysis to determine the set price of the brush set. They need to be priced with the costs of materials, manufacturing, space rental fees, utilities, patents, labeling and other associated fixed and variable costs (overhead).The brushes are set with a selling price of $40. Later, due to a competitor, the business must face a possible price adjustment to sell more brushes. The elasticity of demand, comes into play as price and volume sells go hand in hand. The business will need to review its contribution and make decisions on how to price the set (or lower the price) and make enough to cover production and retain a profit.Adjustment would need to be made to this particular line of business for it to continue to contribute positively to the company.

References 

Borad, S. (2019). Contribution Analysis. Retreived from https://efinancemanagement.com/costing-terms/contribution-analysis-importance-uses (Links to an external site.)

Douglas, E. (2012).  Managerial Economics  (1st ed.) [Electronic version]. Retrieved from https://content.ashford.edu