Costs utilized when deciding to purchase the asset

When making business decisions, firms only consider relevant costs (Relevant Cost and Decision Making, 2020). These costs describe avoidable costs when a business is making specific decisions. It is important for EEC to evaluate relevant costs to decide whether to purchase or make the asset. The company should determine whether it has the required components to create a finished product and cost of doing so. After determining the cost of producing the asset, it is also important to compare it with the cost of purchasing it and take the one which is less costly.

Future costs in the decision-making process

A future cost is an estimated quantification of a prospective expenditure’s amount (Kharabadze & Jikia, 2018). Future costs are irrelevant in decision-making because a company cannot affect them by current decisions, and they are all common to all alternatives that a company may choose. Therefore, future costs cannot be avoided because a firm will incur them irrespective of the decision it considers.

Pros and Cons of Acquisition

Pros

Speed: acquiring an asset is among the most time-efficient growth strategies (Nead, 2020). Acquiring a new asset will offer EEC the opportunity to quickly acquire resources as well as core competencies that are not currently holding. Therefore, acquiring a new asset will make the company enter into new markets and product lines faster.

New resources and competencies: EEC may choose to acquire the asset so that it can gain competencies and resources it lacks. The acquisition has multiple benefits ranging from improving long term financial outlook to an immediate increase in revenue. Additionally, acquiring the new asset can lead to diversity and expansion, which can help EEC to weather periods of market or economic slump.

Cons

Financial fallout: returns from the acquired asset may not benefit the company to the extent anticipated. Some of the reasons that can lead to financial fallout include lost of key customers, taking a longer time than usual to acquire the asset, fewer synergies than projected, and higher anticipated price of acquisition (Nead, 2020).

Unrelated diversification: acquiring the new asset may bring together diverse product and service lines, which can lead to difficulties in managing competencies and resources. Additionally, the management of departments and employees can face extreme hurdles due to the acquisition.

References

Kharabadze, E., & Jikia, M. (2018). Determining relevant and alternative costs during decision making. International Journal of Social Science and Economic Research, 3(5).

Nead, N. (2020). Acquisition Pros and Cons – InvestmentBank.com. Retrieved 9 June 2020, from https://investmentbank.com/pros-and-cons/

Relevant Cost and Decision Making. (2020). Retrieved 10 June 2020, from https://accounting-simplified.com/management/relevant-costing/