Premium
Capital budgeting with technology choice and demand fluctuations in a simple manufacturing model: Sample calculations and observations on output flexibility
Author(s) -
Aranoff Gerald
Publication year - 1992
Publication title -
managerial and decision economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.288
H-Index - 51
eISSN - 1099-1468
pISSN - 0143-6570
DOI - 10.1002/mde.4090130505
Subject(s) - allowance (engineering) , flexibility (engineering) , idle , economics , sample (material) , capital (architecture) , microeconomics , econometrics , operations management , computer science , chemistry , management , archaeology , chromatography , history , operating system
In capital budgeting with technology choice and demand fluctuations errors can arise if managers unitize fixed costs and do not make proper allowance for expected idle capacity. In a standard‐cost system, managers and accountants should use as the standard cost E(AC), the expected average cost, employing a procedure shown in the paper. Managers should compare E(AC) and the short‐run‐average‐cost minimum, an output‐flexibility indicator proposed by the author. The more output flexible is the equipment, the less of an increase in costs to a firm if there are wider fluctuations in output rates than planned.