Scribd
Upload
6 views43 pages

MA 5

Uploaded by

khushinagar9009
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
6 views43 pages

MA 5

Uploaded by

khushinagar9009
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 43

DECISION MAKING

INTRODUCTION
 In any business, the basic function of management is to
make decision making decision is to choose among two or
more available alternatives.
 For example, the management may have to decide whether
to raise the price of its product, lower it or leave it
unchanged at its present level.
 To sell its product at a loss in a falling market or shut down
its operations for the time being.
 In a company, manufacturing television sets, the
management may have to decide whether to make a
component of the TV within the company or to buy it from
an outside supplier.
 Thus, the management is continuously engaged in
evaluating various alternatives and in selecting the best
out of these.
 The decision cost and other factors
RELEVANT COST AND RELEVANT
REVENUES
 When management makes the decision, it has to
concentrate on the only relevant cost and relevant
revenue.
 Not all cost and revenues are relevant.
 The relevant cost and relevant revenues are those
expected future cost and expected future revenues that
differ under different alternative courses of action being
considered.
 Cost & revenues that remain unaffected by a decision are
obviously irrelevant and need not be considered when
making a decision.
 Relevant costs are future costs that will differ depending
on the actions of the management.
 In one decision, a cost may be relevant but in another
decision the same cost may not be relevant.
 For each decision, the management must decide which
costs are relevant.
MAKE OR BUY DECISION (INSOURCING OR
OUTSOURCING)

 Insourcing is producing the goods by the firm itself


whereas outsourcing is the process of purchasing the
goods or services from outside suppliers. For example a
car manufacturer made a lion outside windows to
supply some component parts but chooses to
manufacture other parts internally.
 So when a component part is available in the market at
a price below firms own total cost.
 This type of decision based on total cost analysis may be
misleading. Such a decision can be arrived at by
comparing the outside suppliers price with the firm's
own marginal cost.
 Example component is ₹100 per unit, consisting of ₹ 80 as
variable cost and ₹20 as fixed cost.
 Suppose, an outside firm is prepared to supply this component
at ₹90, it may appear that it is cheaper to buy the component.
 But a study of cost analysis will show that each unit is
manufactured makes a contribution of ₹20 towards the
recovery of fixed cost.
 This fixed cost has to be incurred whether we make or buy.
 The real cost of making the component part is only ₹80 which
is its variable cost.
 This offer of ₹90 per unit should not be accepted because if
accepted, the component will really cost ₹110 that is ₹90 of
purchase price plus ₹20 of fixed cost which cannot be saved if
the component is not produced.
 However, before arriving at final decision due consideration
should be given to other factors. For example it should be
considered as to whether plant capacity released by the non
manufacture of the component part is put to some alternative
use or not.
PRODUCT MIX DECISIONS
 This makes our product mix denotes the proportion in
which various products are sold or produced.
 The problem of selecting a profitable mix of sales thus
arises only when a business enterprise has a variety
of product lines and each making a contribution of its
own.
 Any change in sales mix also results in a change in
the profit position.
 The technique of marginal costing helps the
management in determining the most profitable mix.
WHERE THERE IS A KEY FACTOR

 Key factor is operating, selection of the most


profitable sales mix is based on contribution per
unit of key factor. Product which makes the
highest amount of contribution per unit of key factor,
is the most profitable 1 and its production is pushed
up.
 The second preference is given to the product which
yields the second highest contribution per unit of key
factor and so on in the end that product should be
produced which yields least contribution per unit of
key factor and to the extent of availability of the key
factor
EXPLORING NEW MARKETS
 Sometimes, a company is not able to fully utilize plant
capacity when selling at total cost plus profit basis.
 In such a case, it may explore new markets and find
opportunities to receive additional bulk order or export
order at a price which may be below total cost but above
variable cost so that the price makes a contribution.
 The entire amount of contribution from such sales is
profit because fixed cost is already recovered from
current sales at total cost plus profit basis.
 Such additional sales are below total cost is possible
only because in accepting bulk orders and export sales,
price discrimination is possible.
 In this way spare plant capacity can be utilized to earn
additional profit.
ADDITIONAL ORDER FOR UTILIZING
SPARE CAPACITY

 When a company has the spare or idle capacity it


is not able to utilize because of sales constraints
or it receives a bulk order at below normal selling
price such an order should be accepted provided
existing sales are not affected by price
discrimination it will earn the company
additional profit by utilizing spare capacity.
EXPORT SALES
 Additional orders may be accepted from a foreign market
are below normal price or below total cost but above
marginal cost.
 Export scenes yield additional contribution when such sales
are at a price which is above variable cost.
 When determining profitability of accepting export orders
the following additional factors should be considered
 Export sales may result in additional cost like special
packing cost, additional quality checks, freight and
insurance charges etc if not borne by importer. These costs
should be deducted from contribution to determine profit
from the export order.
 Export sales result in certain cost benefits like export
subsidy from government, exemption or concession in excise
duty drawbacks etc.In data mining profit from export order
these items should be deducted from cost or additional
contribution.
PLANT SHUTDOWN DECISION
DIFFERENTIAL COST ANALYSIS

 It has been said that in decision making the management


has to compare two or more alternatives.
 Differential cost analysis is a special technique to help
management in decision making which shows how costs
and revenues would be different under different
alternative courses of action.
 Differential cost is the difference in the cost between one
alternative and another. It is obtained by subtracting the
cost of one alternative from the cost of other alternative.

You might also like