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Flashcards in Decision-making Deck (20)
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1

Relevant costs

Future incremental (specific to decision making) cash flow

2

Opportunity costs

Next best alternative

3

Contribution

Revenue minus variable

4

Breakeven (units)

Fixed costs/contribution per unit

5

Breakeven (revenue)

fixed costs/ contribution sales ratio (contribution/sales)

6

Margin of safety
definition and units/percentage

How much below budget sales would be before a sale is made
In units = budgeted sales - breakeven sales
As a percentage =(budgeted sales - breakeven sales)/ budgeted sales

7

Assumptions of breakeven analysis

Constant fixed costs
Constant variable cost per unit
Constant selling price
No change in inventory

8

Multi-product breakeven analysis

Units to breakeven = fixed costs/contribution per standard mix

9

Limiting factors

If more than one scarce resource rank of contribution per unit and state the optimum production plan

10

Shadow prices

How much more is it worth paying to obtain a resource (above what you are already paying)

11

Price elasticity of demand

Effect on demand when price changes
If below one it is inelastic (price has little effect of demand)

12

Price elasticity of demand equation

% change in demand / % change in price

13

Total cost function

TC = a + BQ
TC = total cost
a= fixed costs
B = variable cost per unit
Q - quantity

14

Marginal revenue

Continue to sell products as long as additional revenue gain from selling another item is greater than the additional cost incurred
Marginal revenue = Marginal costs
Marginal revenue = a - 2bQ
a= fixed costs
b = variable costs per unit

15

Price skimming

Initially charge high price to re-coup start up price and then lower the price over the life cycle

16

Price Penetration

Initially selling price low to gain high sales and market share

17

Complementary product

Products sold in conjunction (razor and shaving cream)

18

Discrimination pricing

Price set on a range of factors (age of a person/time of the day)

19

Maximax
Maximin
Maximax regret

Maximax = focusing on the best possile outcome to achieve the highest returns (risk seekers)
Maximin = Achieving minimum possible return (risk adverse)
Maximax regret = regret of making the wrong decision i.e. opportunity loss

20

Expected value (EV)

Probability x return