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Areas of Decision Making

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Learning objective

In this chapter we will check different types decision making problems as faced by top management on day-to-day operation basis. Management has to consider the best alternative situations so that the profit of the organisation will increase. Some of these are as follows

1. product sales pricing & mix

2. limiting factors

3. multiple scare resource problem ( Ref chapter 10a)

4. make or buy

5. selection of products, etc etc


Decision making are of 2 types.

(1) Long term decision making :

For this purpose we generally apply capital budgeting technique.

(2) Short term decision making ( i.e. generally in one financial year)

(a) Pricing decision for the particulars period for which we apply different pricing techniques.

(b) Other than pricing decision such as-

(i) Except or reject an offer

(ii) Make or buy the product or slab component

(iii) Sale or process

(iv) Exploring new foreign market.

(v) Discontinue of a product

(vi) Shut down of a factory etc.

In this way there may be different type of heading.

However, the solution technique are limited to four only :

(1) Problem of limiting factor or limiting factor approach ( for common process applicable for more than 1 product).

(1) Differential cost & incremental Revenue analysis where the production & sales will continue till Marginal Revenue > Marginal costs.

(3) Indifference cost approach

(4) Relevant cost approach i.e. considered only those cost & revenues which are related to the purpose or decision. Generally we considered the following 3 items for this purpose.

(a) Variable cost of the proposal

(b) Discretionary Fixed cost

(c) Opportunity cost

If the price offered by the customer is more than the total relevant cost, then the offer is accepted.

In case of problem where minimum sale price is to be quoted then total relevant cost = Total minimum sales price.

Limiting Factor Problems

When many products are produced from a single resource & total resources requirement of the product is greater then resource available, then it known as limiting factor of production.

Objective of the management maximization of contribution or contribution-Discretionary Fixed cost.


Compute contribution p.u. & identify the nature of fixed cost.


Identify the limiting factor

(a) Where demand is given

(b) Where demand is not given (apply the concept of bottle neck)





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