Price elasticity of demand and capacity expansion features in an enhanced ABC product-mix decision model

Wen Hsien Tsai, Lopin Kuo, Thomas W. Lin, Yi Chen Kuo, Yu Shan Shen

Research output: Contribution to journalArticlepeer-review

19 Scopus citations

Abstract

In recent years, activity-based costing (ABC) has become a popular cost and operations management technique to improve the accuracy of firms' product or service costs in order to help the firms stay competitive. Since the product-mix decision is an important ABC application, most studies in the ABC literature were generally focused on the effect of ABC analysis on the product-mix decision or product cost calculation. However, these studies usually ignored some important factors, such as: capacity expansions, management's degree of control over resources, purchase discount, and change of product's price. Hence, in this paper, we consider these factors to propose a more general model. This model can help managers to make a product-mix decision and identify excess resources so that managers can redeploy them to optimise resource usage. Furthermore, since previous studies did not consider the impact of price changes on product-mix decisions, this paper also examines the impact of reducing product price with different price elasticity of demand (D) on the simulated company's profit.

Original languageEnglish
Pages (from-to)6387-6416
Number of pages30
JournalInternational Journal of Production Research
Volume48
Issue number21
DOIs
StatePublished - 1 Nov 2010

Keywords

  • activity-based costing (ABC)
  • capacity expansion
  • management's control over resources ability
  • price elasticity of demand (D)
  • theory of constraints (TOC)

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