Chapter 6 "Financial analysis in operations management", after studying this chapter you will be able to: Introduce various cost definitions and demonstrate how they are applied in operations management; demonstrate how break-even analysis is used within an operations management context; demonstrate how concepts of obsolescence, depreciation, and taxes impact the decision-making process with an operations management context;. | F O U R T H E D I T I O N Financial Analysis in Operations Management © The McGraw-Hill Companies, Inc., 2003 supplement 5 DAVIS AQUILANO CHASE PowerPoint Presentation by Charlie Cook Supplement Objectives Introduce various cost definitions and demonstrate how they are applied in operations management. Demonstrate how break-even analysis is used within an operations management context. Demonstrate how concepts of obsolescence, depreciation, and taxes impact the decision-making process with an operations management context. Introduce and demonstrate how the time value of money can be used as a financial tool in the decision-making process with respect to various types of operations management issues. © The McGraw-Hill Companies, Inc., 2003 S5– Chapter Objectives (cont’d) Demonstrate the use of various financial functions that are available on Excel. © The McGraw-Hill Companies, Inc., 2003 S5– Cost Definitions Fixed Costs Expenses such as rent that remain constant over a wide range of output volumes. Variable Costs Expenses such as material and direct labor that vary proportionately with changes in output. Sunk Costs Expenses already incurred that have no salvage value. © The McGraw-Hill Companies, Inc., 2003 S5– Fixed and Variable Cost Components of Total Costs Exhibit © The McGraw-Hill Companies, Inc., 2003 S5– Cost Definitions (cont’d) Opportunity Costs Profits lost when one alternative is chosen over another that would have provided greater financial benefits. Avoidable Costs Expenses such as higher labor costs resulting from poor productivity incurred if an investment is not made. Out-of-Pocket Costs Actual cash outflows associated with a particular alternative. © The McGraw-Hill Companies, Inc., 2003 S5– Cost Definitions (cont’d) Cost of Capital Usually expressed as a percentage rate, it reflects the cost of the money invested in a project. Comparisons: The cost of borrowing money to finance the project. Interest lost on short-term . | F O U R T H E D I T I O N Financial Analysis in Operations Management © The McGraw-Hill Companies, Inc., 2003 supplement 5 DAVIS AQUILANO CHASE PowerPoint Presentation by Charlie Cook Supplement Objectives Introduce various cost definitions and demonstrate how they are applied in operations management. Demonstrate how break-even analysis is used within an operations management context. Demonstrate how concepts of obsolescence, depreciation, and taxes impact the decision-making process with an operations management context. Introduce and demonstrate how the time value of money can be used as a financial tool in the decision-making process with respect to various types of operations management issues. © The McGraw-Hill Companies, Inc., 2003 S5– Chapter Objectives (cont’d) Demonstrate the use of various financial functions that are available on Excel. © The McGraw-Hill Companies, Inc., 2003 S5– Cost Definitions Fixed Costs Expenses such as rent that remain constant over a wide .
