Chapter 8 Short Term Business Decisions A How Do Managers Make Decisions a Relevant information Is expected future data i ii Differs among alternatives b Short Term Special Decisions B Special Orders Regular Pricing Decisions a Special Sales Order customer requests a one time order at a reduced sales price i Things Managers Must consider 1 2 Is there excess capacity to fill this order Is reduced sale price high enough to cover the incremental costs ii iii 3 Will special order affect regular sales in the long run If expected increase in revenue EXCEEDS expected increase in variable and fixed costs Accept the Special order If expected increase in revenue is less than expected increase in variable and fixed costs Reject the order b Regular Pricing Decisions i Things Managers Consider 1 What is our target profit 2 How much will customers pay 3 Are we price takers of price setters for this product ii Price Takers price that is given is price of market 1 Product lacks uniqueness 2 Heavy Competition 3 Pricing Approach emphasizes target costing a Target Costing b The price is set in market and the way to achieve desired profit is by cutting costs not raising prices MarketPrice Profit Trget TotalCost iii Price Setters price is set 1 unique product 2 Less Competition 3 Pricing approach emphasizes Cost Plus Pricing a Cost Plus Pricing Total Cost Desired Profit Cost Plus Price b Ability to raise prices versus cutting cost C Other Special Business Decisions a When to drop Products Departments Territories i Questions managers ask 1 Does the Product provide Positive Contribution Margin 2 Will fixed costs continue to exist if we drop product 3 Any direct fixed costs that can be avoided if we drop the product 4 Will dropping the product affect the sales of any other products 5 What could we do with the freed capacity ii Fixed costs 1 Unavoidable Fixed Costs when fixed costs continue to exist even after a product is dropped a Be incurred regardless if the product is dropped 2 Direct Fixed Costs fixed costs that are linked to the product b Product Mix Decision i Constraints things that restrict production or sale of a product 1 What Constraints hinder us from making all of the units we 2 Which Products offer the highest contribution margin per 3 Would emphasize one product over another affect fixed can sell unit of constraint costs ii Emphasize the product with the highest contribution margin per unit of the constraint c Outsourcing Decisions i Management must consider 1 How do our variable costs compare to the outsourcing costs 2 Are any fixed costs avoidable if we outsource 3 What could we do with the freed capacity ii iii If incremental costs of making EXCEED the incremental costs off outsourcing Outsource If incremental costs of making is Less than the incremental costs off outsourcing Do NOT Outsource d Sell As is or Process Further Decisions i Management must ask 1 How much revenue will we receive if we sell the product as is 2 How much revenue will we receive if we sell the product after processing further 3 How much will it cost to process the product further ii Process Further Extra Revenue extra costs of production iii Do NOT Process Further Extra Revenue Extra cost of prod
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