decision making

Paramjit Sharma
decision making- process

defining the problem

identifying alternatives
determine relevant cost
& revenue data
evaluating the data
considering non cost factors
making decision

Paramjit Sharma
Special costs for decision making

relevant costs & irrelevant costs

sunk costs
differential costs
marginal costs
imputed costs
opportunity costs
replacement costs
out of pocket costs
future costs
conversion cost

Paramjit Sharma
 special decision making areas

selling price decisions

make or buy decisions
sales mix decision
selecting suitable method
of production
plant shut down decisions

Paramjit Sharma
 special decision making areas

selling price decisions

•Competition & depression

•Additional orders
•Utilizing spare capacity
•Export market

Paramjit Sharma
Selling at or below marginal cost

•to popularize new product

•eliminate competitors
•dispose perishables
•earning foreign Exchange
•to keep pm in operation
•prevent future loss of Orders
•helping other products making
profits
•Keeping employees Occupied

Paramjit Sharma
 pricing in competition & depression

•may be priced below total cost

•under marginal costing it may be above mc

•production may continue

•for a short term only

Paramjit Sharma
additional orders exploring foreign markets

•under utilized capacity

•order below total cost but above mc

•export sales may result in additional costs

•additional cost be deducted from profits

•subsidy exemptions be deducted from cost

Paramjit Sharma
 make or buy decisions

Other factors

Plant capacity
Mc + loss of contribution
•Outside price compared of displaced works
with marginal cost

•Outside if mc>op
Non cost factors

•Inside if mc<op Assurance of quality

Assurance of continuity
Assurance of maintaining price

Paramjit Sharma
 sales mix decisions

proportion in which various products

are produced or sold

Selecting most profitable mix

Paramjit Sharma
Selection of a suitable method of production

new product
whether to go for machine or hand labour

ordinary or automatic machine

select -which gives largest contribution
Paramjit Sharma
plant shut down- not sufficient business

temporary suspension

permanent suspension

Paramjit Sharma
Paramjit Sharma
differential cost is the difference in cost
between two alternatives

Paramjit Sharma
Incremental revenue is the difference in revenue
between two alternatives

Paramjit Sharma
 -application

•determining optimum level of production

•accepting a special order

•adding or dropping a product

•evaluating make or buy alternatives

•Introducing an additional shift
Paramjit Sharma
 -application

•determining optimum level of production

Paramjit Sharma
 -application

•accepting a special order

Paramjit Sharma
 -application

•adding or dropping a product

Paramjit Sharma
 -application

•evaluating make or buy alternatives

Paramjit Sharma
 -application

•Introducing an additional shift

Capacity units of VC FC TC DIFF SALES

Incremental

outputs Rs Rs Rs Rs Rs
Revenue
60% 60000 9000 40000 49000 540000 ---

70% 70000 10500 40000 50500 1500 56000 2000

80% 80000 12000 40000 52000 1500 60000 4000

90% 90000 13500 40000 53500 1500 60300 300

100% 100000 15000 40000 55000 1500 61000 700

Paramjit Sharma