Short term decision making

Question 1

when are short term decisions made?

Answer 1

business continually make short term decisions, they involve the day to day, operational, running of the business

e..g should we change prices this year?

Question 2

what is important in short term decision making?

Answer 2

to only consider relevant factors (relevant costs)

Question 3

what is meant by relevant costs?

Answer 3

STD will not have an effect on ALL types of costs that an organisation incurs, some costs are just set and can’t be changed without making long term decisions

decision making process should only include costs that will change as a result of the decision

Question 4

what is revenue expenditure>

Answer 4

day to day costs

Question 5

how is revenue expenditure split tin terms of classification?

Answer 5

• functional
  = direct
  = indirect (overheads)
• behaviour
  = variable
  = fixed

Question 6

other than classifying costs by direct and indirect how else can costs be classified?

Answer 6

by behaviour

Question 7

what are ways to measure activity levels?

Answer 7

• volume of production in a period

- number of items sold in a period

Question 8

what are variable costs?

Answer 8

costs that change in direct proportion to level of activity

i.e raw materials) - increase no. of units increases the costs
(labour costs
(sales commission)

Question 9

what are fixed costs?

Answer 9

costs remain the unchanged / unaffected by changes in activity
changes occur due to management decision
(cut back on warehouses, more long terms costs
salary of directors, rent)

Question 10

what is contribution analysis?

Answer 10

tool managers use for STD
look at whether each product made/used makes a contribution (if there is then it is worth making)

• if FC are covered : any excess = profit
• enables business to choose most profitable good / services to produce in the short term

Question 11

what happens with fixed costs in the short term?

Answer 11

• irrelevant o many STD
• stay the same in the short term
• only if extra fixed costs are incurred do they become relevant e.g. rent on new building to create new products

Question 12

what are the contribution calculations you will need?

Answer 12

• contribution per unit
• total contribution
• contribution margin

Question 13

how do you do contribution per unit?

Answer 13

sale price - variables

Question 14

hw do you do total contribution?

Answer 14

cost per unit x no. of units sold

Question 15

how do you do contribution margin?

Answer 15

(total contribution / total revenue) x 100

percentage

Question 16

what does contribution tell you?

Answer 16

if cont > FC = profit
cont < FC = loss
cont = FC = break even

Question 17

what is CVP?

Answer 17

cost volume profit
e.g. if you changed costs how would that affect profit and volume

once selling price and costs structure has been made it is possible to manipulate data to provide info for management decision
what would dhapne if price went up by 10%?

play around with the costs of a company

Question 18

what are other short term decision making tools?

Answer 18

• break even point
• target profit
• margin of safety

Question 19

what is break even point?

Answer 19

• profit = 0
• the point in which business makes neither a profit or loss
• sales are sufficient to pay total costs

Question 20

how do you work out break even point?

Answer 20

number of units

= total FC / (cont / unit)

Question 21

what is target point?

Answer 21

how many units do e need to sell to achieve target level of profitability?

units = fixed costs + target price / cont per unit

Question 22

what is margin of safety?

Answer 22

how much is sold over and above the break even point?

• percentage or in unites

Question 23

how do you work our the margin of safety/

Answer 23

percentage =
actual units sold - break even units / actual units sold x 100

units =
actual units sold - break even units

Question 24

what is contribution?

Answer 24

sales revenue that does go towards variables and so is used to cover fixed costs, anything left over is profit
- shows that maximising sales of one product may have higher contribution than another due to pricing

Question 25

how can contribution be used?

Answer 25

widespread utility:

• product range/mix/closure
• special orders
• decision making with scarcity
• mutually exclusive decisions (make or buy)

Question 26

how is contribution analysis used for product range descsions?

Answer 26

• which products should we make?
• products making a positive contribution (i.e selling price > variable cost)

-

Question 27

how can contribution be applied to closure of dept/product?

Answer 27

over time management must cintiutally appraise the viability of specific products it offers and departments it operates

apply contirbution methodology to reach viability decision

Question 28

why are qualitative factors important in decision making?

Answer 28

• highly influential in decision making process
• reverse decisions / conflicts, fincinaial data says reject decision but it is accepted for qualitative reasons (rural transport)
• customers (demand/loyalty/inclusion/of a product)
• employees (trade union reposes/motivational impact)
• competitors (realisation)
• legal constraints (health and safety)
• suppliers (quality/promptness/credit facilities/ after sales service)