10.1 Identify Relevant Information for Decision-Making
- Decision-making involves choosing between alternatives.
- A critical step in the decision-making process is identification of all the relevant information for each alternative. Relevant information is any information that would have an impact on the decision.
- Relevant information can come in the form of costs or revenues, or be nonfinancial in form. For information regarding costs, this means determining which costs are avoidable and which are unavoidable.
10.2 Evaluate and Determine Whether to Accept or Reject a Special Order
- Deciding to accept or reject a special order is a choice between alternatives.
- Accepting or rejecting a special order involves comparing the purchase price associated with the special order to the cost to produce the items.
- This decision is highly influenced by whether the firm being offered the special order is operating below or at capacity.
- Qualitative factors would include consequences such as potential loss of current customers or displacement of jobs.
10.3 Evaluate and Determine Whether to Make or Buy a Component
- Deciding to outsource a component of the operations or manufacturing of a business is a choice between alternatives.
- Choosing whether to make or to buy a product, or choosing to have services performed by an outside company, are outsourcing decisions.
- Outsourcing decisions involve comparing the cost to keep the product or service in-house to the cost of buying the product or service from an outside party.
- An important consideration in these types of decisions is unavoidable costs.
10.4 Evaluate and Determine Whether to Keep or Discontinue a Segment or Product
- Deciding to keep or discontinue a product line or a segment of a business is a choice between alternatives.
- The choice to keep or eliminate involves comparing the business’s total operating income generated from keeping the product or segment and comparing this to the business’s total operating income generated if the product or segment is eliminated.
- An important consideration in these types of decisions is allocated costs.
10.5 Evaluate and Determine Whether to Sell or Process Further
- Deciding to do more work on a product to develop it into a new product is a choice between alternatives.
- Choosing whether to sell a product as is or to process it further involves comparing the selling price without further processing (at split-off) to the net price (selling price less additional processing costs) that would be obtained if the product were processed further.
- An important consideration in these types of decisions is the realization that the costs incurred up to the split-off point are irrelevant to the decision.
10.6 Evaluate and Determine How to Make Decisions When Resources Are Constrained
- Deciding to how to use scare resources is a choice between alternatives.
- Scarce resources can include anything that limits productive capacity, such as machine-hours or labor hours.
- Choosing how to use the scarce resource involves determining the contribution margin for each product or service that uses the constrained resource. The products or services with the highest contribution margin have the largest impact on income.
- Choosing how to manage the scarce resource will help reduce bottlenecks.