Short-run Decision Analysis

Short-run (term) decisions

• Operational, tactical in nature, meeting short-term goals, or reacting
to a crisis, i.e. making the best of resources in the short term

• Each decision involved relatively small amounts of monetary value

• Relatively easy to change decision, withdraw from activity if the

business environment changes
Cost Information for Short-run Decision
Why is it important?

• Managers can predict or project what will likely to happen in the coming
years using historical information
• It helps managers adapt to the changing environment and take advantage
of opportunities which may improve the organizations profitability and
liquidity in the short-run
• It will help managers examine the profitability of a segment, select an
appropriate product mix, try contracting with outside suppliers of goods, or
sell the product as it is or process the product
• It helps determine If the projected results are achieved
Management Decision Cycle
The five steps that managers take in making decisions are as follows:

1. A problem or need is discovered

2. Identify all possible courses of action to solve the problem
3. Analysis of each possible solution of the problem
4. Selection of the best course of action
5. Feedback of the effect of the action taken
Incremental Analysis
• Managers use incremental analysis to compare alternative projects by
focusing on the differences in the project’s projected revenues and
costs. The firm’s accountant can organize relevant information to
determine which alternative contributes more to profit, or incurs the
lowest costs.
• Incremental analysis is a problem-solving approach that applies
accounting information to decision making. Incremental analysis can
identify the potential outcomes of one alternative compared to
another.
Contribution Margin and Short-Run Decision
Contribution margin is commonly used to evaluate the profitability of a segment. It can be also used
as a tool for decision making in cases involving special order sales, and the selection of appropriate
product mix

It provides one way to show the profit potential of a particular product offered by a company and
shows the portion of sales that helps to cover the company's fixed costs. Any remaining revenue left
after covering fixed costs is the profit generated.

Formula:
Contribution Margin = Sales Revenue − Variable Costs
Outsourcing Decisions
Outsourcing refers to the use of suppliers outside the
organization to service or produce goods that could be
done internally.

Outsourcing includes the make-or-buy decisions which

are decisions about whether to produce the part or buy
it from outside suppliers
Make or Buy Decision
Also referred to as an outsourcing decision, a make-or-buy decision compares
the costs and benefits associated with producing a necessary good or service
internally to the costs and benefits involved in hiring an outside supplier for the
resources in question. To compare costs accurately, a company must
consider all aspects regarding the acquisition and storage of the items must.
Special Order Decisions
Segment Profitability Decisions
Product Mix Decisions
Sell or Process Further Decisions