short-term decision making Flashcards
short-term decisions
definition
day-to-day decisions that affect operations
cost behaviour patterns
how does cost vary at different levels of activity
variable costs
definition
costs that change in direct proporiton to level of activity
variable cost
example
raw materials
fixed costs
definition
costs remain unaffected by level of activity
fixed costs
example
salary of managing director
contribution
definition
portion of sales revenue not consumed by variabe costs so can contibute to fixed costs
contribution per unit
equation
sales price- variable costs
total contribution
equaiton
contribution per unit x number of units sold
contribution margin
total contribution/ total revenue x 100
if contribution is larger than fixed costs is there a profit or loss?
profit
what happens if contribution and fixed costs are equal?
break-even
profit using contribution
equation
total contribution - fixed costs
break-even point
definition
sales are suffiecent to pay total costs so profit equals zero
break-even units
equation
FC/ SP-VC
margin of safety
definition
how much is sold over and above the break-even point
margin of safety percentage
equation
actual units sold- brekeven units/ actual units sold x 100
margin of safety units
equation
actual units sold- breakeven units
product range decisions
definition
chose products that make a positive contrubtion (selling price higher than varibale costs)
special order
definition
spare capacity? if positive contribution then worth accepting
resource constriants
definition
when resourcs are scarce prioritize products with highest contribution.
how do you work out which product is best resource constraints
look at products currently being made, calculate contribution per resrouce e.g kilo of material, or labour hours. Then rank the highest contribtuion
mutually exclusives
definition
choose best option, opportunity costs. What will you lose halting prduction of other products?
