Case 2- Relevant Information for Decision Making Essay

Case 2- Relevant Information for Decision Making - Essay Example These decisions are based on many calculations, based on estimates and actual figures, prepared by the management accountants. One of the most appropriate approaches for decision making is ‘decision-relevant approach’. (Drury, 2004) In this paper, we have analyzed the given data using decision relevant approach. The first step in this approach was to identify the relevant and irrelevant costs of both the alternatives for comparison basis. As described by Drury, relevant costs and revenues are that income and expenses that are affected in the future because of making any decision. (Drury, 2004) 1) Direct Material Cost is a relevant cost for decision making, because if the outsourcing decision is taken, then no such costs will be incurred by BMC. Further, since there is no future obligation of the existing direct materials’ contracts, therefore, no penalties or future obligations will be imposed on BMC on termination of these contracts. This means that direct material cost is taken as a relevant cost in calculating the total expense of manufacturing Global System navigator (GPSN), and no impact is taken to calculate the total expenses of outsourcing the production (buying from a contractor). 2) Direct Labor Cost is also a relevant cost for decision making because if the decision for outsourcing the production of GPSNs will be taken no such costs will be incurred. However, because of termination of the employment contracts, BMC will have to pay penalties of $66,000 annually for four years. Therefore, direct labor cost per unit is taken as the part of cost of manufacturing GPSN, whereas $ 5,500 is added in the monthly outsourcing expense ($66,000/12). 3) As it is given in the given data that because of failing quality control 2% of the units produced are discarded. Therefore, in order to meet the need for 8,000 products in a month 8,327 units should be manufactured by BMC. However, in case of outsourcing, BMC will buy 8,000 units from Far East Enterprises