4. Short-term Decision Making

 

Short-term Decision Making

  • Overview: Short-term decision-making involves using cost data to make immediate business decisions, like pricing or product mix choices.

4.1 Selling Price Decisions

  • Considerations: Market demand, competitor prices, and cost structure.
  • Solved Example:
    • Problem: A company’s unit cost is $15, and it aims for a 20% profit margin. Calculate the selling price.
    • Solution: Selling Price = $15 / (1 - 0.20) = $18.75

4.2 Make or Buy Decisions

  • Considerations: Compare in-house production costs with purchase costs.
  • Solved Example:
    • Problem: Producing a part in-house costs $6 per unit, while buying it from a supplier costs $5. Should the company make or buy if it needs 1,000 units?
    • Solution: Total In-house Cost = $6 * 1,000 = $6,000
      • Total Purchase Cost = $5 * 1,000 = $5,000
      • Decision: Buy from supplier.

4.3 Sales Mix Decisions

  • Goal: Maximize profit by choosing an optimal product mix based on contribution margin.
  • Solved Example:
    • Problem: Product A has a contribution margin of $10, Product B $15. Limited resources allow only 1,000 units. Decide the mix for maximum profit.
    • Solution: Allocate resources based on highest contribution margin to maximize profit.

4.4 Selection of Suitable Method of Production

  • Factors: Cost, quality, and efficiency of different methods.
  • Solved Example:
    • Problem: Method 1 costs $10 per unit, Method 2 costs $8 per unit, but Method 1 has better quality. Choose based on criteria.
    • Solution: Discuss quality trade-offs and make a decision.

4.5 Plant Shutdown Decision

  • Considerations: Compare ongoing costs of keeping the plant open versus potential savings from shutting it down.

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