Analysis for Decision Making
0REVIEWING THE CHAPTER
Objective 1: Explain how managers make short-run decisions.
Short-run decision analysis
is the systematic examination of any decision whose effects
will be felt over the course of the next year. To perform this type of analysis, managers need
both quantitative and qualitative information. The information should be relevant, timely,
and presented in a format that is easy to use in decision making.
Short-run decision analysis is an important part of the management process.0
Analyzing short-run decisions in the planning stage involves discovering a problem or
need, identifying alternative courses of action to solve the problem or meet the need,
analyzing the effects of each alternative on business operations, and selecting the best
alternative. Short-run decisions should support the company’s strategic plan and
tactical objectives and take into consideration not only quantitative factors, such as
projected costs and revenues, but also qualitative factors, such as the competition,
economic conditions, social issues, product or service quality, and timeliness.
In the performing stage, managers make and implement many decisions that affect
their organization’s profitability and liquidity in the short run. For example, they may
decide to accept a special order, to change the sales mix, or to outsource a product or
service. All these decisions affect operations in the current period.
When managers evaluate performance they analyze each decision to determine if it
produced the desired results, and, if necessary, they identify and prescribe corrective
Throughout the year managers prepare reports related to short-run decisions. In
addition to developing budgets and compiling analyses of data that support their
decisions, they issue reports that communicate the effects their decisions had on the
Objective 2: Define
and describe how it applies to short-run decision
(also referred to as
) is a technique used in
decision analysis that helps managers compare alternative courses of action by focusing on
the differences in projected revenues and costs. Only data that differ among the alternatives
are included in the analysis. A cost that differs among alternatives is called a
The first step in incremental analysis is to eliminate irrelevant revenues and costs—that is,
those that do not differ among the alternatives. Also eliminated are sunk costs. A
is a cost that was incurred because of a previous decision and cannot be recovered through
the current decision. Once all irrelevant revenues and costs have been identified, the
incremental analysis can be prepared using only projected revenues and expenses that differ
for each alternative.