Decision-making Techniques

1 Limiting factors
2 Cost-volume-profit analysis
3 Make or Buy decision making
4 Risk and uncertainty
5 Relevant cost analysis
6 Pricing decision
Acceptance of special orders
Further process decision making
Shut-down decision making

1 Limiting factors- factors that limit the production of entity

for single limiting factor

using Throughput Costing
using Marginal Costing
(i) Contribution per limiting factor
Product
Saving from making in house ($/unit) contribution per unit ($/unit)
limiting factor per unit (kg or hour / unit ) limiting factor per unit (kg or hour / unit )
Saving from making in house ($/ limiting factor) contribution per limiting factor
(ii) Ranking
(iii) Production schedule according to ranking
Production plan
Available resources ( kg or hour)
(-) committed
(-) ranking
C
A
B

CVP analysis ( Break-even analysis )

Contribution per unit (CPU)

contribution to sales ratio ( C/S ratio)

(i) Break-even point ( BEP)

Sales units to get BEP
Sales volumes to get BEP
Sales price to get BEP

(ii) Target profit

Sales units to get target profit
Sales volumes to get target profit
Sales price to get target profit
(iii) Margin of safety %

Margin of safety (units)

Margin of safety ($)

Margin of safety( %)

For multiple products

Overall CPU
or
sales units product
1000 A
2000 B
3000 C
6000

Overall CS ratio
or
Product
A
B

3 Make or Buy decision making

Relevant production cost

Prime cost
Direct material
Direct labour
Direct expense
Variable production overhead
Total variable cost
Direct fixed production overhead
Opportunity cost ( contribution loss ) if any
Cost of making in house
Cost of buying outside
Saving from making in house ($/unit)
Decision

6 Pricing decision

Price elasticity of demand (PED)

Demand curve equation

P = a-bQ
P= optimal price
Q= quantity demanded
a= price at which demand is zero ( i.e. maximum price )
b= change in price/ change in quantity

Q=?
Marginal Revenue=Marginal cost
a-2bQ=Variable cost
Q= (a-V.C) / 2b

Further process decision making

Incremental revenue ( before// after)

Incremental cost
Variable cost
Fixed production OH
Opportunity cost ( if any )

Profit
for multiple limiting factor
using Linear Programming model

A B C
6 4 2
2 1.5 0.5
3 2.7 4
2 3 1

selling price - V.C/unit

CPU/selling price *100
Total contribution/ total sales revenue *100

fixed cost/CPU
fixed cost/ CS ratio or Sales units to get BEP * selling price
Total cost / sales units (Sales value/ sales units)

( fixed cost+target profit )/ CPU

( fixed cost+target profit )/ CS ratio
(Total cost+target profit) / sales units
Budgeted sales units- Break even sales units
Budgeted sales value- Break even sales value

Margin of safety (units) / Total Sales (units) *100

Margin of safety ($) / Total Sales ($) *100

Total contribution / total sales units

CPU sales units mix

2 17% 0.333
3 33% 1
4 50% 2
1.000 3.333

Total contribution / total sales value ($)

CS ratio Sales value mix

2 33% 0.666667
3 67% 2
1 2.666667

x
x
x x
x
x
x
x
x
x
x
Make

% change in quantity / % change in price

a=current price + (change in price/ change in quantity) * current quantity

x
x
x
x
x