Applied Short-Term Decision Making

Question 1

How can Decision Making change Widespread Utility?

Answer 1

• Product Range
• Special Orders
• Decision Making w/ Scarcity
• Mutually Exclusive decision (make/buy)

Question 2

What is accounted for when deciding whether to continue producing a good/service?

Answer 2

• If Selling Price > VC, a product makes a positive contribution
  In the SR, FC are unavoidable and irrelevant
• Contribution analysis can be used to dictate how many units of each should be sold

Question 3

How can Short-Term Decision Making affect Special Orders?

Answer 3

• Decision whether to accept/reject it
• Special Orders include large orders or changes in price
• If a special order can give a positive contribution and no increases in FC arise; ACCEPT IT

Question 4

How can Short-Term Decision Making affect Decision Making with Scarcity?

Answer 4

• Resource Constraints:
• Scarcity causes Constraints, you cannot do everything you want
• Choice is prioritised via ranking
• Turn contribution per unit into contribution per input (Labour/Material) if scarce
• Then, put it into a ‘production order’, ranking best to worst of production

Question 5

How can Short-Term Decision Making affect Mutually Exclusive decisions?

Answer 5

• Mutually exclusive:
• A constrained decision, one thing prevents you from doing another
• This is an either/or decision, hence has elements of opportunity costs
• If there is no spare production, you have to stop production of a ‘keto’ good to make another good
• Hence, you include implicit (opportunity) and explicit (production) costs

Question 6

What are some Qualitative Factors that may override the decision from accounting processes

Answer 6

• Customers–Inclusion/exclusion of a product in range & interdependence Demand, Loyalty
• Employees–Closure/Relocation decisions require sensitivity - Motivational impact?–Trade union response?
• Competitors–Retaliation? (not operating in a vacuum)
• Legal constraints–Health and safety issues
• Suppliers–Quality/Promptness/Reliability of supplier;–Credit facilities?–After sales service? Good relationship