Decision Making - Other Situations Flashcards
How does capacity constraints and product mix affect a firm decision making process?
Marginal analysis also applies to decisions about which products and services to sell and in what quantities given the known demand and resource limitations
For example: If the firm can sell as much as it can produce and has a single resource constraint, the decision rule is to maximize the contribution margin per unit of the constrained resource
However, given multiple constraints, the decision is more difficult. In that case, sophisticated techniques such as linear programming must be used
What is involved in sell-or-process further decisions?
In determining whether to sell a product at the split-off point or process the item further at additional cost, the joint cost of the product is irrelevant because it is a sunk cost
The sell-or-process decision should be based on the relationship between the incremental costs (the cost of additional processing) and the incremental revenues (the benefits received)
