Short-Run Decision Analysis 27. Short-Run Decision Analysis and the Management Process OBJECTIVE 1:...

Short-Run Decision Analysis27

Short-Run Decision Analysis and the Management Process

OBJECTIVE 1: Descibe how managers make short-run decisions using incremental analysis.

Exhibit 1: Incremental Analysis


• Short-run decision analysis is the systematic examination of any decision whose effects will be felt over the course of the next year– Discuss the quantitative information and

qualitative information that are important in making short-run decisions.


• When performing short-run decision analysis in the planning stage of the management process, managers– Discover a problem or need. – Identify alternative ways of solving the

problem or meeting the need.


• When performing short-run decision analysis in the planning stage of the management process, managers (cont.)– Analyze the effects of each solution.– Select the best course of action.


• During the year, managers make many decisions that affect their organization’s profitability and liquidity in the short run.


• Incremental analysis in making short-run decisions– Irrelevant costs and revenues

• Differential cost or incremental cost

– Incremental analysis• Sunk cost

– Opportunity costs

Incremental Analysis for Outsourcing Decisions

OBJECTIVE 2: Perform incremental analysis for outsourcing decisions.

Exhibit 2: Incremental Analysis: Outsourcing Decision


• Outsourcing decisions.– Strong candidates include payroll processing,

training, managing vehicle fleets, sales and marketing, custodial services, and information management.


• Outsourcing decisions. (cont.)– Outsourcing can reduce a company’s

investment in physical assets and human resource, which can improve cash flow.

– Exhibit 2 provides an example of incremental analysis of an outsourcing decision.

Incremental Analysis for Special Order Decisions

OBJECTIVE 3: Perform incremental analysis for special order decisions

Exhibit 3: Incremental Analysis: Special Order Decision


• Decision to accept or reject a special order.– Special order analysis– Incremental analysis for special order decisions

generally ignores fixed costs.


• Decision to accept or reject a special order. (cont.)– Price and relevant cost comparison.– Minimum bid price for special order.

Incremental Analysis for Segment Profitability Decisions

OBJECTIVE 4: Perform incremental analysis for segment profitability decisions

Exhibit 4: Incremental Analysis: Segment Profitability Decision


• Segment profitability decisions– A segment margin is a segment’s sales revenue

minus direct cost• Positive segment margin: segment’s revenue is

greater than its direct costs.

• Negative segment margin: segment’s revenue is less than its direct costs


• Segment profitability decisions (cont.)– Includes preparation of segmented income

statement using variable costing to identify variable and fixed costs.

• Direct fixed costs are traceable to the segment.

• Common costs are the remaining costs and are not assigned to segments.

Incremental Analysis for Sales Mix Decisions

OBJECTIVE 5: Perform incremental analysis for sales mix decisions involving constrained resources.

Exhibit 5: Incremental Analysis: Sales Mix Decision Involving Constrained Resources


• Sales mix decision.– Steps involved in the decision analysis:

• For each product affected by the scarce resource, calculate the contribution margin per unit by subtracting the variable costs per unit from the selling price.


• Sales mix decision.– Steps involved in the decision analysis: (cont.)

• For each product, calculate the contribution margin per unit of the scarce resource (such as machine hours) by dividing the contribution margin per unit by the quantity of the scarce resource required per unit.


• Sales mix decision. (cont.)– The alternative that maximizes the contribution

margin per scarce resource is the one that should be selected.

Incremental Analysis for Sell or Process- Further Decisions

OBJECTIVE 6: Perform incremental analysis for sell or process-further decisions.

Exhibit 6: Incremental Analysis: Sell or Process-Further Decision


• Incremental analysis of sell or process-further decisions.– Managers compare the incremental costs and

revenues of selling a joint product at the split-off point with the incremental costs and revenues of processing it further.


• Incremental analysis of sell or process-further decisions.– Only costs that occur after the split-off point

are relevant.– A product should be processed further only if

the incremental revenues generated exceed the incremental costs incurred.

Short-Run Decision Analysis 27. Short-Run Decision Analysis and the Management Process OBJECTIVE 1:...

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