Accountign 2 studyguide 2 - How do managers make short-term...

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How do managers make short-term business decisions? 1. define business goals 2. identify courses of action 3. gather and analyze relevant information: compare alternative 4. Choose the best alternative 5. Implement decision 6. Follow-up: Compare actual result with the results anticipated Focus on costs and revenues that are relevant to the decision 1. is expected future data 2. differs among alternatives a. accept or reject special order How operating income would change or differ under each alternative (relevant information approach). Consider 6 kinds of decisions 1. special sale orders a. when a customer requests a one time order at a reduced sales prices i. often for large quantities b. considerations: i. do we have excess capacity to fill order ii. will the reduced sales price be high enough to cover incremental costs (variable and additional fixed) 1. positive contribution margin iii. will it affect regular sales in the long run c. if expected increases in revenues 2. pricing a. considerations i. target profit 1. tied to amount of assets invested ii. how much customer will pay iii. price-taker or price-maker 1. price-takers – no control, process costing a. product lacks uniqueness b. heavy competition c. pricing approach emphasizes target pricing i. revenue at market price – desired profit = target full cost ii. if more than target full cost: 1. accept a lower profit 2. cut fixed costs a. discretionary 3. cut variable costs 4. use other strategies (strengthen brand name) 2. price-maker, job costing a. cost-plus pricing i. full cost + desired profit = cost-plus price 3. dropping products, departments, and territories a. considerations:
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i. product provide positive contribution margin ii. will fixed costs continue even if drop product (unavoidable) 1. irrelevant iii. any direct fixed costs that can be avoided if drop 1. relevant iv. dropping affect sales of other products v. what else could do with freed capacity 4. product mix a. considerations: i. constraints stop from making (displaying) all units can sell 1. highest CM per unit of constraint ii. products that offer the highest contribution margin per unit of constraint iii. emphasizing one product over another affect fixed costs
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