Costing and Pricing in the Short-Term

• Operating Leverage is Fixed Costs / Total Costs
• Operating Leverage measures how revenue growth translates into operating profit.
• Decisions that appear to be good in the short term (e.g. special order to take up temporary spare capacity), may not be optimal in the long term. Increasing the range of special orders or accepting/rejecting a series of these orders should be viewed as long-term decisions outside the normal basis of operations, and evaluated to consider the long-term costs and benefits due to this shifting structure.
• When capacity is constrained by bottlenecks (products competing for factors of production), the optimal product mix is determined by [CM per Unit / Limiting Factor per Unit].
• Product mix decisions are crucial in the long term. They can affect economies of scope, customer retention and brand value.
• Even when unit costs of outsourcing may be lower than production, some fixed costs will remain in place. Therefore it would be more profitable to utilize these costs, rather than leave them untouched (otherwise you would pay for both your fixed costs and outsourcing).
• Discontinuation decisions are dependent on whether a department generates a positive contribution to the firm (even if it operates at a loss). However, for this decision-making to be accurate, indirect relevant costs must be accurately measured and allocated.
• Outsourcing can give benefits of higher quality due to specialisation but can also give the suppliers monopoly power in the long-term
• Making, rather than buying, can give a company greater control over production but also risks causing inefficiencies and quality issues
• A lean structure involves outsourcing while a rigid structure involves many sub-departments in a company
• Higher operating leverage is desirable because it means that the marginal contribution for each output is larger (since variable costs are lower).