The document discusses key concepts in strategic decision making including: 1) Learning objectives around making or buying parts, adding or deleting product lines, optimal product mix, joint product processing, and equipment replacement. 2) Opportunity cost, outlay cost, and differential cost analysis in decision making. 3) Factors to consider in make or buy, addition or deletion of products/services, optimal use of limited resources, joint product split-off points, and equipment replacement decisions. 4) Identifying irrelevant or mis-specified costs that could impact decisions.

1. DECISION MAKING,ALL
STRATEGIC DECISIONS
REQUIREMENTS
Presented by-
GROUP 7 Gaurav Khatri
Devendran S.P
Siddharth Tripathi
Vandana Madhuri Singh
Timsi Luthra
Pushpam Shree
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2. LEARNING OBJECTIVES
 Decide whether to make or buy certain parts or products
 Choose whether to add or delete a product line using relevant
information.
 Compute the optimal product mix when production is
constrained by a scarce resource.
 Decide whether a joint product should be processed beyond
the split-off point.
 Decide whether to keep or replace equipment
 Identify irrelevant and mis-specified costs.
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3. OPPORTUNITY,
OUTLAY AND
DIFFERENTIAL
COSTS AND
ANALYSIS
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4. OPPORTUNITY COST
It applies to a resource that a company already
owns or that it has already committed to
purchase, the maximum available contribution
to profit forgone by using such a resource for a
particular purpose.
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5. OUTLAY COST
The cost that requires a future cash
disbursement. These costs include cost for
items such as material and labor.
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6. DIFFERENTIAL COSTS
The difference in the total cost between two
alternatives.
Example- Decision regarding the purchase of a
machinery out of two. The differential cost is the
difference in the prices paid plus the costs of
operating the machines.
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7. INCREMENTAL ANALYSIS
An analysis of the incremental costs and
benefits of a proposed alternative compared
with a given alternative.
When multiples alternatives are available, the
decisions are taken with the help of evaluation
of the incremental costs and benefits of the
alternative against other alternatives.
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8. MAKE OR BUY DECISIONS
A basic make or buy question is whether a company
should make its own parts that it will use in its final
products or buy the parts from vendors. Sometimes
the decisions are based on qualitative factors and
sometimes on quantitative factors. It all depends upon
the situation.
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9. In terms of quantitative factors, a key factor is
whether there are idle facilities. Many
manufacturing firms make parts only when
they cannot use their facilities to better
advantage. Also, identifying and accurately
measuring the additional costs for making the
part is important.
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10. DELETION OR
ADDITION OF
PRODUCTS,
SERVICES OR
DEPARTMENTS
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11. AVOIDABLE AND
UNAVOIDABLE COSTS
(FIXED EXPENSES)
Avoidable costs: Those costs which will not
continue if an ongoing operation is changed
or deleted- are relevant.
Unavoidable costs: Costs that will continue
even if a company discontinues an operation.
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12. It is important to remember that non-financial
information can influence decisions to add or
delete products or departments. Any negative
impacts on employees, customers or
communities could create future financial
problems for the company that are much larger
than short-term cost savings from
discontinuing a product or a plant.
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13. OPTIMAL USE OF LIMITED
RESOURCES
(PRODUCT-MIX DECISIONS)
A product mix decision requires a focus on
each product’s contribution margin and its use
of capacity.
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14. JOINT PRODUCTS
When two or more manufactured products
 Have relatively significant sales volumes, and
 Are not separately identifiable as individual
products until their split off point.
Manufactures that have joint products frequently
face the decision to sell or to process further.
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15. SPLIT –OFF POINT
That juncture of manufacturing where the joint
products become individually identifiable. Any
costs beyond that stage are separable costs
because they are not part of the joint process.
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16. KEEP OR REPLACING
EQUIPMENT
An important aspect of such decision is that
the book value of the old equipment is not a
relevant consideration in deciding whether to
purchase a replacement.
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17. Before making the decision, we must consider
the relevance of four commonly encountered
items:
 Book value of old equipment
 Disposal value of old equipment
 Gain or loss on disposal
 Cost of new equipment
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18. IDENTIFY IRRELEVANT OR
MISSPECIFIED COSTS
 In the decision to dispose of obsolete inventory, the
original cost of inventory is irrelevant because there
is no way to restore the resources used to buy or
produce the inventory.
 Units fixed costs can be misleading because of the
differences in the assumed level of volume on which
they are based.
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