561. Nevertheless, if top managers wish to create a culture of autonomy and independent profit responsibility, they must allow their subordinate managers to control their own destiny—even to the extent of granting their managers the right to make mistakes.562. Making such decisions is often a difficult task that is complicated by numerous alternatives and massive amounts of data; however, in this chapter you will learn how to narrow your focus to the information that matters.563. A sunk cost is a cost that has already been incurred and cannot be changed regardless of what a manager decides to do.564. An opportunity cost is the potential benefit that is given up when one alternative is selected over another.565. Opportunity costs are not usually found in accounting records, but they are a type of differential cost that must be explicitly considered in every decision a manager makes.566. Furthermore, the danger always exists that an irrelevant piece of data may be used improperly, resulting in an incorrect decision.567. Decisions relating to whether product lines or other segments of a company should be dropped and new ones added are among the most difficult that a manager has to make.568. The explanation for this apparent inconsistency lies in part with the common fixed costs that are being allocated to the product lines.569. One of the great dangers in allocating common fixed costs is that such allocations can make a product line look less profitable than it really is.570. Additionally, managers may choose to retain an unprofitable product line if it helps sell other products, or if it serves as a “magnet” to attract customers.571. Also, some companies feel that they can control quality better by producing their own parts and materials, rather than by relying on the quality control standards of outside suppliers.572. These economies of scale can result in higher quality and lower costs than would be possible if the company were to attempt to make the parts or provide the service on its own.573. However, the company may wish to consider one additional factor before coming to a final decision—the opportunity cost of the space that it currently uses to produce the shifters.574. Companies are forced to make volume trade-off decisions when they do not have enough capacity to produce all of the products and sales volumes demanded by their customers.575. Because fixed costs remain the same regardless of how a constrained resource is used, managers should ignore them when making volume trade-off decisions and instead focus their attention on identifying the mix of products that maximizes the total contribution margin.576. Given that some products must be cut back when a constraint exists, the key to maximizing the total contribution margin may seem obvious—favor the products with the highest unit contribution margins.577. This example clearly shows that looking at each product’s unit contribution margin alone is not enough; the contribution margin must be viewed in relation to the amount of the constrained resource each product requires.578. As we have discussed, managers should emphasize products that make the most profitable use of the constrained resource.579. The last three methods of increasing the capacity of the bottleneck are particularly attractive because they are essentially free and may even yield additional cost savings.580. A sunk cost such as depreciation of old equipment is still a sunk cost regardless of whether it is traced directly to a particular segment on an activity basis, allocated to all segments on the basis of labor-hours, or treated in some other way in the costing process.
