Valdivia Company Produces Remote Control Helicopters – Decision To Introduce OS2 Model

Relevant Costs and Revenues

Answer to Question 1

Requirement a

As per the case study which is provided the management of Valdivia Company which is engaged in production of remote control Helicopters is considering introducing OS2 Model of the Helicopters which will be an upgraded version of OS1 Model. The relevant revenue of the business which is can be identified is the sales revenue of the business (Velu & Stiles, 2013). The relevant costs of the business which is identified are direct material and labour costs of the business and also the overhead costs of the business.

The management should wait for clearing the stocks of OS1 Models of the business and then introduce the OS2 model as in this way the business will not face significant losses. The management should wait till 1^st January 2019 for introducing the OS2 models of Helicopters in the market. This will give the management ample time to clear the overstocked OS1 model before the product becomes out of fashion in the market (Pettigrew, 2014). The costs which are irrelevant in case of the business are development costs and Marketing and administration costs which are incurred by the business. These costs are fixed in nature and the business will be incurring the same for whatever decision is taken by the general manager.

Requirement b

The four qualitative factors which must be considered by the general manager of the business before arriving at an appropriate decision for selection of product models are listed below:

• Demand in Market: The preference of the customers always has a huge influence in the decision-making process of the management. In the case where the demand for the product OS2 Model Helicopters are more in the market, the management will be forced to take the decision of introducing the model in the market for the purpose of gaining as much revenue as possible from the same (Noreen, Brewer & Garrison, 2014). In this case, the OSI Model Helicopters would have to be replaced by the updated version.
• Competitive pressure: The pressure of competition also plays an important role in estimating whether the products which are offered by business are competitive in the market or not. In order to meet the competition, the management decision of selecting the appropriate product model will help the business. In order to effectively stay competitive in the market, the management of the company might introduce the OS2 Model of Helicopters which is an upgraded version and therefore will be more competitive in the market.
• Technological advancements: The management also needs to consider the impacts of technological advancements in a business and also on the products of the business. The new software or program function of the Helicopter might bring about rapid changes in the market and might make the old helicopter model obsolete (Fullerton, Kennedy & Widener, 2014). This will only make upgradation in the functioning and product efficiency which will then attract more customers to the business.
• Brand Image: The brand image of the business is a very important qualitative aspect which can affect the decisions which is taken by the general manager. The business will always want to provide the best quality of product to the customers as the same contribute to the brand image of the company. Any decision which can affect the brand image of the business is to be considered highly by the management.

Answer to Question 2

Requirement a

As per the table which is shown above, the management of Caleta Division of Puerto Ltd, produces 400 tables and 24000 chairs. If the company increases the chairs by 4000 more than as shown in the table above, it would be beneficial for the business. In this case the operating profit which is earned by the business is also appropriate if the management offers 4000 chairs more.

The fixed marketing expenses and the depreciation expenses of the business can be considered to be irrelevant costs of the business. These costs are irrelevant as the same will be incurred no matter what decision is taken by the management.

Requirement b

The operating costs which is earned by the business in case the business decides to offer 4000 tables and 24000 chairs are immense and therefore the business shows losses which suggest that the business needs to shut done.

Answer to Question 3

Irrelevant costs are those costs which are incurred by the business which do not affect the decision-making process of the business (Drury, 2013). Sunk cost is one type of irrelevant costs of the business. As the cost are repetitive and not considered in the decision-making process of the business therefore such costs are known as irrelevant costs of the business (Collier, 2015). It is generally seen that non-cash items are mostly irrelevant costs of the business and examples can be given such as depreciation and amortization expenses incurred by the business.

Reference

Collier, P. M. (2015). Accounting for managers: Interpreting accounting information for decision making. John Wiley & Sons.

Drury, C. (2013). Costing: an introduction. Springer.

Fullerton, R. R., Kennedy, F. A., & Widener, S. K. (2014). Lean manufacturing and firm performance: The incremental contribution of lean management accounting practices. Journal of Operations Management, 32(7-8), 414-428.

Noreen, E. W., Brewer, P. C., & Garrison, R. H. (2014). Managerial accounting for managers. New York: McGraw-Hill/Irwin.

Pettigrew, A. M. (2014). The politics of organizational decision-making. Routledge.

Velu, C., & Stiles, P. (2013). Managing decision-making and cannibalization for parallel business models. Long Range Planning, 46(6), 443-458.

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