short-run decision analysis 27. short-run decision analysis and the management process objective 1:...
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Short-Run Decision Analysis27
Short-Run Decision Analysis and the Management Process
OBJECTIVE 1: Descibe how managers make short-run decisions using incremental analysis.
Exhibit 1: Incremental Analysis
Short-Run Decision Analysis and the Management Process
• Short-run decision analysis is the systematic examination of any decision whose effects will be felt over the course of the next year– Discuss the quantitative information and
qualitative information that are important in making short-run decisions.
Short-Run Decision Analysis and the Management Process
• When performing short-run decision analysis in the planning stage of the management process, managers– Discover a problem or need. – Identify alternative ways of solving the
problem or meeting the need.
Short-Run Decision Analysis and the Management Process
• When performing short-run decision analysis in the planning stage of the management process, managers (cont.)– Analyze the effects of each solution.– Select the best course of action.
Short-Run Decision Analysis and the Management Process
• During the year, managers make many decisions that affect their organization’s profitability and liquidity in the short run.
Short-Run Decision Analysis and the Management Process
• Incremental analysis in making short-run decisions– Irrelevant costs and revenues
• Differential cost or incremental cost
– Incremental analysis• Sunk cost
– Opportunity costs
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Incremental Analysis for Outsourcing Decisions
OBJECTIVE 2: Perform incremental analysis for outsourcing decisions.
Exhibit 2: Incremental Analysis: Outsourcing Decision
Incremental Analysis for Outsourcing Decisions
• Outsourcing decisions.– Strong candidates include payroll processing,
training, managing vehicle fleets, sales and marketing, custodial services, and information management.
Incremental Analysis for Outsourcing Decisions
• Outsourcing decisions. (cont.)– Outsourcing can reduce a company’s
investment in physical assets and human resource, which can improve cash flow.
– Exhibit 2 provides an example of incremental analysis of an outsourcing decision.
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Incremental Analysis for Special Order Decisions
OBJECTIVE 3: Perform incremental analysis for special order decisions
Exhibit 3: Incremental Analysis: Special Order Decision
Incremental Analysis for Special Order Decisions
• Decision to accept or reject a special order.– Special order analysis– Incremental analysis for special order decisions
generally ignores fixed costs.
Incremental Analysis for Special Order Decisions
• Decision to accept or reject a special order. (cont.)– Price and relevant cost comparison.– Minimum bid price for special order.
©2011 Cengage Learning All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Incremental Analysis for Segment Profitability Decisions
OBJECTIVE 4: Perform incremental analysis for segment profitability decisions
Exhibit 4: Incremental Analysis: Segment Profitability Decision
Exhibit 4: Incremental Analysis: Segment Profitability Decision
Incremental Analysis for Segment Profitability Decisions
• Segment profitability decisions– A segment margin is a segment’s sales revenue
minus direct cost• Positive segment margin: segment’s revenue is
greater than its direct costs.
• Negative segment margin: segment’s revenue is less than its direct costs
Incremental Analysis for Segment Profitability Decisions
• Segment profitability decisions (cont.)– Includes preparation of segmented income
statement using variable costing to identify variable and fixed costs.
• Direct fixed costs are traceable to the segment.
• Common costs are the remaining costs and are not assigned to segments.
©2011 Cengage Learning All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Incremental Analysis for Sales Mix Decisions
OBJECTIVE 5: Perform incremental analysis for sales mix decisions involving constrained resources.
Exhibit 5: Incremental Analysis: Sales Mix Decision Involving Constrained Resources
Exhibit 5: Incremental Analysis: Sales Mix Decision Involving Constrained Resources
Incremental Analysis for Sales Mix Decisions
• Sales mix decision.– Steps involved in the decision analysis:
• For each product affected by the scarce resource, calculate the contribution margin per unit by subtracting the variable costs per unit from the selling price.
Incremental Analysis for Sales Mix Decisions
• Sales mix decision.– Steps involved in the decision analysis: (cont.)
• For each product, calculate the contribution margin per unit of the scarce resource (such as machine hours) by dividing the contribution margin per unit by the quantity of the scarce resource required per unit.
Incremental Analysis for Sales Mix Decisions
• Sales mix decision. (cont.)– The alternative that maximizes the contribution
margin per scarce resource is the one that should be selected.
©2011 Cengage Learning All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Incremental Analysis for Sell or Process- Further Decisions
OBJECTIVE 6: Perform incremental analysis for sell or process-further decisions.
Exhibit 6: Incremental Analysis: Sell or Process-Further Decision
Incremental Analysis for Sell or Process- Further Decisions
• Incremental analysis of sell or process-further decisions.– Managers compare the incremental costs and
revenues of selling a joint product at the split-off point with the incremental costs and revenues of processing it further.
Incremental Analysis for Sell or Process- Further Decisions
• Incremental analysis of sell or process-further decisions.– Only costs that occur after the split-off point
are relevant.– A product should be processed further only if
the incremental revenues generated exceed the incremental costs incurred.
©2011 Cengage Learning All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.