Short-term Decision Making

Page 1

Make or Buy

What's the issue?

We want to determine whether we should make a product ourselves or outsource the production to another company

What costs will we consider?

incremental costs:

costs that are different under alternative choices

relevant benefits:

incremental benefits from choosing one option over another

Understand the situation

Quantify the situation into incremental costs

Assess the total impact of the alternative

Page 2

Product Mix with Constrained Resources

Whats the issue?

We want to determine how much of each product to make but this is more complex when inputs (materials for manufacturing) are limited.

What costs should we consider?

selling price

direct materials cost

direct labor costs

contribution margin

demand

Understand the situation

Quantify the situation into costs of producing each product

Maximize production out of our most profitable products

Calculate profit per unit

Calculate profit per limited resources:

SP:

DM:

DL:

Profit/unit:

Units of LR:

Profit/unit:

Page 3

Keep or Replace Equipment

Whats the issue?

We want to determine how much it will cost over the asset's life and compare the two pieces of equipment

What costs should we consider?

market value of old machine

cost of new machine

difference in operating costs

Understand the situation

Quantify the situation into the cost and benefit of using both equipment

Choose the equipment that provides the most benefit

Example

Proceeds from Old:

Cost of New:

Savings:

Net Cash Flow: