Decision making techniques Flashcards
What are relevant costs?
Costs which will always be those which can be affected by a certain decision
What are some factors to consider when outsourcing a product?
Price - Agreed price must be guaranteed for an acceptable period of time.
Quality - Is the quality up to standard for the business?
Supply - Can the outsourcing company guarantee continuity of supply and timely deliveries?
Commercial Sensitivity - Will consumers mind if the product isn’t made by the company itself?
How to answer a multiple limiting factor question?
Calculate contribution per unit (selling - variable)
Contribution divide by limiting factor per unit
When is linear programming used?
When there are two products and two or more limiting resources, work out how to maximise contribution
What is discounted cash flow?
Used to help long-term decision making by taking account of time-value of money when comparing cash flows.
What is net-present value?
The net result of comparing the present values of all relevant future cash flows - deducting negative flows from positive ones.
This will usually determine whether the project is worthwhile based on the figures.
What is payback period?
Name some disadvantages of using this method?
Appraisal method which simply asks how long will it take to get the initial investment back.
Dis - Ignores time-value money, ignores any cashflows outside of the payback period, doesn’t distinguish between projects needing large and small investment
What is IRR?
Internal rate of return - discount rate which wen applied to a project results in a new present value of zero. ‘Break-even percentage’.
IRR formula?
Low % rate + (NPV using low % rate/NPV difference) x % rate difference.
What is ARR?
Based off profits, also known as the return on investment.
ARR formula?
(Average annual accounting profits / Investment) x 100
PROFIT IS BASED ON PROFITS AFTER DEPRECIATION
