Short-Run Decision Analysis

1. Short-Run Decision Analysis 27

2. Short-Run Decision Analysis and the Management Process OBJECTIVE 1: Descibe how managers make short-run decisions using incremental analysis.

3. Exhibit 1: Incremental Analysis

4. 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.

5. 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.

6. 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.

7. 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.

8. 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

10. Incremental Analysis for Outsourcing Decisions OBJECTIVE 2: Perform incremental analysis for outsourcing decisions.

11. Exhibit 2: Incremental Analysis: Outsourcing Decision

12. Incremental Analysis for Outsourcing Decisions • Outsourcing decisions. • Strong candidates include payroll processing, training, managing vehicle fleets, sales and marketing, custodial services, and information management.

13. 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.

15. Incremental Analysis for Special Order Decisions OBJECTIVE 3: Perform incremental analysis for special order decisions

16. Exhibit 3: Incremental Analysis: Special Order Decision

17. 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.

18. 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.

20. Incremental Analysis for Segment Profitability Decisions OBJECTIVE 4: Perform incremental analysis for segment profitability decisions

21. Exhibit 4: Incremental Analysis: Segment Profitability Decision

22. Exhibit 4: Incremental Analysis: Segment Profitability Decision

23. 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

24. 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.

26. Incremental Analysis for Sales Mix Decisions OBJECTIVE 5: Perform incremental analysis for sales mix decisions involving constrained resources.

27. Exhibit 5: Incremental Analysis: Sales Mix Decision Involving Constrained Resources

28. Exhibit 5: Incremental Analysis: Sales Mix Decision Involving Constrained Resources

29. 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.

30. 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.

31. 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.

33. Incremental Analysis for Sell or Process- Further Decisions OBJECTIVE 6: Perform incremental analysis for sell or process-further decisions.

34. Exhibit 6: Incremental Analysis: Sell or Process-Further Decision

35. 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.

36. 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.