Production and Inventory Management

1. Production and Inventory Management

2. Why It Is Important to Understandthe Cost Relationships in Production and Inventory Management They affect the economic efficiency (profits) of the firm. An understanding of these relationships helps managers make more effective production decisions.

3. Management Information Systems MIS provides Accurate and timely production and cost information on all phases of the business Data in the proper form needed for decision making Accounting information that will allow fast, accurate development of business financial documents A means for efficiently and effectively monitoring and controlling business production costs

4. Cost Concepts Cost: what is given up to acquire a good or service Opportunity cost: the return (as measured by the highest value) that is given up in a foregone use Implicit cost: costs that do not include cash payments but need to be included in the calculation of the total cost of product

5. Cost Concepts Controllable and Uncontrollable Costs Incremental, Avoidable, and Sunk Costs Total Cost = Total Fixed Cost + Total Variable Costs Total Fixed Cost (TFC) Total Variable Cost (TVC) Total Cost (TC)

7. The Contribution Concept Contribution equals selling price/unitminus variable cost/unit The contribution per unit is used first to payfixed costs and later profits Selling Price/Unit = Total Cost/Unit + Profit/Unit Total Cost/Unit = Variable Cost/Unit + Fixed Cost/Unit Selling Price/Unit � Variable Cost/Unit = Fixed Cost/Unit + Profit/Unit

8. Using the Contribution Concept toEstablish the Selling Price of aNew Product

9. The Shutdown Point Short-term versus Long-term Pricing  In the short term, a firm with idle capacity can take a job where the price does not cover all the total cost as long as the contribution is positive(P � AVC > 0). If the contribution is negative (P � AVC < 0)the firm is better off shutting down. Over the long term, all costs must be covered.

10. Break-Even Analysis Break-even analysis helps managers find the combination of costs, output, and selling price that permits the firm to break even, with no profits and losses

11. Calculating theBreak-Even Point in Units The break-even point is calculated from the profit equation when profit is zero.

12. Calculating the Break-Even Point in Dollars

13. Meeting a Profit as a Percentage of Sales Objective Using Break-Even Analysis

14. Evaluating Changes in Fixed CostsUsing Break-Even Analysis

15. Determining a Selling PriceUsing Break-Even Analysis

16. Inventory Management Reasons to hold inventory Matching supply with demand Prevent stockouts Lower purchasing costs Reasons not to hold inventory High maintenance cost High protection cost Depreciation and obsolescence Taxes

17. Impact of Inventory on Profits

18. The Basic Inventory Management Model The total cost of inventory (TC) equals the sum of ordering costs (OC) and carrying costs (CC)

20. Discussion Questions Explain why an agribusiness manager needs to understand production and inventory management. Give two examples of situations in which cost management made a difference. Describe the relationship between the firm�s accounting system and its management information system. Give a definition for each. Explain which one is most important to management. What is opportunity cost? Is it relevant to business decision making? Explain your answer. Give an example that shows its impact. Describe the relationship between implicit and explicit costs. Describe how they are measured. Explain their role in production and pricing decisions in an agribusiness. Describe, using an example, how failure to properly account for them can get an agribusiness into trouble.