Journal of Accounting and Management Information Systems (JAMIS)

Considerations for establishing the production strategy on the account of cross margin and opportunity costs

Supp/2006 ,   p24..28


Keywords:   opportunity costs, production strategy, gross margin/hour, restrictive sector

According to a valid and general definition, the opportunity cost is understood as the value of the best alternative to renounce. The aim of this paper is to distinguish the part of opportunity costs in establishing the production strategy in the existing conditions of a restrictive sector. The restrictive sector is defined as a sector with a production capacity which is physically limited in situation of a certain variable (number of production-hours, number of machine-hours, etc.). This variable makes the level of a certain “good” to be proportionally reversed with the variable of another “good”. The problem which appears in the conditions reminded before and ensuring the best covering contribution, is finding the best combination of “goods” which can be produced in order to record the lowest opportunity cost. For the establishment of the optimal combination are considered the followings: unitary gross margins and unitary time of “goods” production. Depending on this, gross margin per hour is determined and it is established the products hierarchy (descendent sense). The products hierarchy, maximum number of functioning (restrictive element considered) of the restrictive sector and the size of the surely request of these “goods” (ordered quantities by potential clients) will determine in the end the maximum quantity required to be made from every product individually. To distinguish the size of opportunity costs, every possible combination between “goods” are considered and determined according to restrictive element (the variable).