Management's Decision Making Process
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Financial Information
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Non-financial Information
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Revenues
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Effect on employee turnover
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Costs
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Environment
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Profitability
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Company's image
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Criteria: Accept if Contribution Margin is positive
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Assumptions:
- Other products not affected by special price - Other customers don't get special price |
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No change in fixed costs, only variable cost change
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Criteria: Replace if new asset increases net income
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Book value: original cost of asset
Salvage Value: money earned when reselling asset Useful Life: how long asset is expected to generate revenue |
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Criteria: drop item if improves net income, retain segment unless FC > lost CM
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Need to know if FC are
- Avoidable - Unavoidable: must be allocated on remaining segments |
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Criteria: select product that maximizes net income
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Short term decision: focus on product with greatest CM unit
Long term decision: can constraint be reduced/eliminated - Change CM unit - Remove limitations on ressources |
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Maximize net income
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Identify expenses that vary with decisions
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Relevant costs
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Opportunity Costs
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Sunk Costs
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Cost in future
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Cost in past
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Criteria: Outsource if cost saving is positive
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Advantages:
- Frees up capacity for other use - Shifts production risks to the supplier |
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Disadvantages:
- Potential loss of quality control - Hard to move back insource |
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Criteria: Process further until revenue < costs
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Produce multiple product simultaneously from single raw material
- Some products can be sold as is - Some products can be processed further - Products identifiable from each other at split-off point |
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Used to identify and manage constraints to achieve goals
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Requires identifying and constant attempts to reduce/eliminate constraint
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