Ch.

6 Short term decision

Whenever you need to make a business decision, invariably you have

to weigh one choice against another. Sometimes, the choice is between
Project A and Project B, and sometimes the choice is between Project
A and doing nothing at all. A cost-benefit analysis is the simplest way of
comparing your options to determine whether to go ahead with a
project.
Cost-benefit analysis works best when most of the costs and benefits
associated with a decision can be reduced to financial terms, so that
they can be more easily compared. In addition, the analysis is most
effective when there are few qualitative issues impacting the decision.
When there are significant qualitative components associated with a
decision, it is nearly impossible to reduce the decision down to a
quantitative outcome.
Cost-benefit analysis involves weighing the costs associated with a
decision against the benefits arising from that decision. The analysis
is used to decide whether to proceed with a course of action or not.
Cost-benefit analysis can include both quantitative and qualitative
factors. For example, the analysis of a decision to construct a facility
in a particular city could include quantitative factors, such as the
amount of tax breaks that can be obtained, as well as qualitative
factors, such as the rating of the schools in that city to which workers
would send their children. This approach is quite useful for clarifying
the issues associated with a decision.
Disadvantages of Cost-Benefit Analysis

There are a few problems with cost-benefit analysis. First, it does not
provide consistent results when the decision maker must compare
qualitative concepts, without being able to convert them to financial
outcomes. The concept can also yield inconsistent results when cash
inflows and outflows are expected to occur over long periods of time,
since it can be quite difficult to accurately predict the amount and/or
timing of the more distant cash flows. For longer-term analyses, it can
make more sense to employ a net present value analysis, which is
structured to deal with distant cash flows in more detail, as well as to
incorporate the time value of money.

Another concern with cost-benefit analysis is the time required to

conduct it. Because of the relatively high cost, it rarely makes sense
to employ a cost-benefit analysis when reviewing the options related
to relatively small expenditures. In these cases, managers typically
rely on their experience to make a decision, rather than a hard
quantitative analysis.

cost benefit analysis facilitates the course of the decision-making

process across a wide variety of areas. It is applied to many disciplines
from business to finance. You can take advantage of using cost benefit
analysis when;

• Comparing two or more projects

• Deciding whether to start a new business
• Making the right hiring decisions
• Comparing investment opportunities
• Evaluating social benefits
• Evaluating policies
• Making decisions regarding changes

Product Mix

Product Mix is a collection or portfolio of entire varieties of products

marketed by the company. Moreover, we can also call it the composite
of all the product lines and sub-categories existing in the company.
Companies can have a wide or narrow mix depending upon
products and distinct customer needs.

A wide product portfolio allows catering to a large customer base.

Whereas a narrow mix helps bring variations to serve customers’ unique
needs.

However, companies must make product mix decisions cautiously.

Goals
Product mix assists marketers in satisfying their goal of efficiently
serving customers’ distinct needs. To achieve this goal, marketers
focus on factors governing product mix as follows:

• Sales Growth
The primary objective of every organization is to increase their
overall sales. For this purpose, they can either launch new products
or expand existing markets. One can increase sales through the
following strategies:
o Market Penetration
o Market Development
o Product Development
o Product Diversification
• Sales Stability
It is another vital factor in achieving stability in sales. It serves as a
base for planning – sales, production and distribution. Also, it
facilitates entry into new markets and balances total sales and
product mix.
• Profits
The ultimate goal of each organization is to earn a good amount of
profits. And, product mix helps in generating profits by offering
distinguished products.

Factors affecting Product Mix

The product mix can be expanded, contracted, or modified depending on
the following factors:
1. Profitability-
Every company has an aim of maximizing its profits and for this, they
try to make certain changes in the product mix such that it has a
positive impact on the company’s profitability. The company prefers
introducing more product lines or product items to its existing
product lines to improve profitability. In the meantime, the product
mix is constantly adjusted to realize more profits.
2. Objectives and Policy of Company:
The company formaulates its product mix to attain the objectives it
has set. Therefore, the addition, subtraction, or replacement of the
product lines or the product items are based on the company’s
target. Hence, the product mix is prepared and modified according
to a company’s policy.
3. Production Capacity-
 The decisions regarding the marketing mix, depend on the capacity
of the plant or production of the company to a large extent. The
company designs its product mix in a way that hails optimum
production capacity.
4. Demand-
Mostly the Product mix decisions are taken concerning demand. A
Marketer should study consumer behavior to find the popularity of
their products. The Change in the preferences of the consumers’
especially for fashion, interests, habits, etc., must be reflected in the
product mix of the company. The company, naturally, prioritizes the
products which have more demand. In case of falling demand, a
company must drop poor products gradually. Thus, the product mix
is adjusted to meet consumer needs and wants over time.
5. Production Costs-
The product mix is widened or narrowed depending upon the
production costs of the respective items. The company will prefer
those products, which can be produced within the budgeted limit. At
times, the manufacturing costs for existing products rise, then the
company decides to drop such products to reduce their production
costs. It also tries to balance selling price, profit margin, and
production costs.
6. Government Rules and Restriction-
Companies generally produce products that are not restricted or
banned by the governments. At times, a company has to stop
certain products or varieties when they are declared illegal. In the
same way, social and religious protests also play a vital role in this
regard. The size and composition of the product mix is directly
affected by the contemporary legal framework.
7. Demand Fluctuation-
Apart from the behavior of the consumer, demand also fluctuates
due to other reasons as well. Demand is affected more due to
seasonal effects, non-availability of substitutes, increase in
population, war, situations of drought, flood, or any other reason. To
meet the changing demand for certain products, the company has
to adjust its product mix.
8. Competition-
It is one of the major factors affecting the product mix. All
the companies try to formulate their product mix in a way that the
competitions can be strongly responded to. The product mix
 strategy adopted by the close competitors has a direct significant
impact on the company’s product mix.
9. Impact of Other Elements of Marketing Mix-
Other elements of the marketing mix such as price, promotion, and
distribution are also equally important in designing the product mix.
The company tries to maintain consistency among these all
elements to carry out marketing activities effectively and efficiently.
10. Overall Business Condition or Condition of Economy-
Economic conditions domestically as well as globally are also
considered. Due to the process of liberalization and globalization,
no business can dare to underestimate the macro picture of the
world economy. Therefore, a company must keep in mind the
condition of the domestic economy concerning the world economy
and is more relevant for a company that is involved in international
trade.

JOINT PRODUCT (DECISION TO Sell now process further)

One major decision a company has to make is to determine the point at
which to sell their product—in other words, when it is no longer cost
effective to continue processing the product before sale. The point at
which some products are removed from production and sold while others
receive additional processing is known as the split-off point. When
facing the choice of selling or processing further, the company must
determine the revenues that would be received if the product is sold at
the split-off point versus the net revenues that would be received if the
product is processed further. This requires knowing the additional costs
of further processing. In general, if the differential revenue from further
processing is greater than the differential costs, then it will be profitable
to process a joint product after the split-off point. Any costs incurred prior
to the split-off point are irrelevant to the decision to process further as
those are sunk costs; only future costs are relevant costs.
Joint Costs: All the common costs on the products up to the split off
point.
The decision Rule is if the incremental cost revenue is more than the
incremental cost of processing the product further then the product
should be further processed.
EXAMPLE

Seeds Farm, Inc. produces apples which it sells to local grocery

stores. The Farm is considering turning the apples into apple
butter. The local grocery stores have stated that they would be
willing to pay $2.35 per jar of apple butter. The Farm produces
750,000 apples per year and sells them to the grocery stores for 15
cents each. The apples cost $90,000 to produce. Each jar of apple
butter would require 5 apples. Additional costs related to the
production is estimated to be $1.25 per jar. Should Seeds Farm sell
the apples as is or convert the apples to apple butter?
We need to consider each of the alternatives: selling apples or making
apple butter. Is any of the information in the problem irrelevant? Yes, the
cost of producing the apples. Whether Seeds Farm sells the apples or
sell apple butter, they will need to pay to produce the apples. Since the
$90,000 is common to both alternatives, it is irrelevant.

Let’s look at how much revenue the Farm will generate if the apples are
sold as is.

750,000 apples X .15 per apple = $150,000

Since the apples are being sold as is, there are no additional costs
associated with this revenue.

Now let’s compute how much could be made if Seeds Farm produces
apple butter. First, we will look at the revenue. Since it takes 5 apples to
make each jar, figure out how many jars can be produced first.

750,000 apples / 5 apples per jar = 150,000 jars

Calculate the total revenue based on 150,000 jars.

 150,000 jars X $2.35 per jar = $352,500

That is a lot more revenue, but remember there are also costs
associated with generating that revenue.

150,000 jars X $1.25 per jar = $187,500

$352,500 – $187,500 = $165,000 net profit

Finally, compare your results:

The farm will make more money if it makes apple butter than if it sells
apples.