SHORT-TERM

DECISION-MAKING

AL F. BERBANO
 DECISION MAKING

The function of selecting courses of action

for the future.
 DECISION MODEL

A formal method used by managers for

making a choice. It often involves both
quantitative and qualitative analyses.
 BASIC STEPS IN A DECISION MODEL
A. Identify the problem. The typical short-term decision-
making cases may involve questions on:
1. Whether to accept or reject a special order or
business proposal;
2. Whether to make or buy a part, sub-assembly, or
product line (insourcing vs. outsourcing cases);
 BASIC STEPS IN A DECISION MODEL

3. Whether to sell or process a product further;

-

4. Whether to continue operating or close a

business segment;
5. Which is the best product-mix considering
capacity constraints;
↳ limitations
 BASIC STEPS IN A DECISION MODEL

6. How profit factors should be changed to a

achieve a profit goal; and
7. How much price should be charged for the
company’s product or services (Pricing decisions).
B. Obtain information and make predictions

1. Qualitative and quantitative information

f- -

a. Qualitative factors - outcomes that cannot easily and

accurately be measured in numerical terms.
b. Quantitative factors - outcomes that can more easily be
expressed in numerical terms.
B. Obtain information and make predictions

2. Relevant information - the information to be gathered

should be relevant and related to the decision-making case.
a. Relevant Costs and Revenues - expected future costs
and revenues that differ among alternative courses of action.
Future oriented & differential
The following are relevant costs:
1. Differential costs - costs that are present in one alternative
in a decision-making case, but absent in whole or in part in
another alternative.
2. Avoidable costs - costs that can be eliminated, in a whole or
in part, when one alternative is chosen over another in a
decision-making case.
3. Opportunity costs - refers to the contribution to income that
is foregone (or lost) when one action is taken over the next
best alternative course of action.
The following are irrelevant costs:
Historical
µ

1. Sunk cost - cost that has already been incurred and

therefore cannot be avoided regardless of the alternative
course of action.
2. Fixed costs - costs that do not differ between or among the
alternatives under consideration.
↳ remains constant so hindi differential
C. Identify and evaluate the alternative courses of
action, then choose the best alternative
● Only relevant factors should be considered in evaluating the
alternatives.
● As a general rule, the best alternative is the one that will give
the organization the highest income (or lowest loss).
 BASIC STEPS IN A DECISION MODEL
D. Implement the decision.
E. Evaluate the performance of the decision implemented to
provide feedback. This feedback can help the decision maker in
making better decisions in the future.
CHARACTERISTICS OF RELEVANT COSTS
1. DIFFERENTIAL - cost that changed from one alternative
to another.
2. FUTURE-ORIENTED - referred to as planned costs,
budgeted costs, projected costs or estimated costs.
 Relevant costs
1. Variable costs
2. Direct fixed costs
3. Traceable costs
4. Avoidable costs
5. Opportunity costs
 Irrelevant costs
1. Sunk costs
2. Fixed costs (except direct FC)
3. Common (Allocated) costs electricity

4. Unavoidable costs
 SHORT-TERM NON- ROUTINE DECISION GUIDELINES
SITUATIONS
1. Make or buy a component part? Where can we save?

2. Accept or reject special sales order? If there is an incremental profit, accept!

÷
cm
-

D_FC→ segment 3. Drop or continue a division? If the direct segment margin is positive,
continue!
l=÷mar9n
-
 SHORT-TERM NON- ROUTINE DECISION GUIDELINES
SITUATIONS
4. Sell as is or process further? If there is a profit from further
processing, then - go ahead!

ejeasonal 5. Continue operations or temporary shut- If sales is greater than the shut-down
down? Units sold > shut down point point, better continue operating!
( Fixed shutdown cost )

|
cost -

"" " "

6. Maximize or minimize bid price? Focus on the incremental costs…..

☐
Shut down cost
cost
e.
warehouse
g
if mags top operating
Yung
SHORT-TERM NON- ROUTINE
SITUATIONS
7. Optimization of scarce resources
8. Sell now or later?
DECISION GUIDELINES
Prioritize the product that gives the
highest CM based on the limited
resource.
If the expected increase in sales is
0than the incremental costs of
greater -
storage, then sell later!
SHORT-TERM NON- ROUTINE DECISION GUIDELINES
SITUATIONS wager aim
e- 5-
so

g.
9. Replace or retain an old asset? If the net cash inflows (NCI) is > the net
cash outflows (NCO), replace the asset!
↳ pri
purchase
(Disregard the time value of money and
tax effects)

10. Scrap or rework a defective unit? Choose the alternative that gives the
highest short-term profitability.
Thank you!

Source: Roque/Agamata