Describe A Decision Made By Your Chosen Company That Involve

Describe A Decision Made By Your Chosen Company That Involved Costs Th

Describe a decision made by your chosen company that involved costs that should have been ignored. (Note this is not 'expenditures that should not have been made.' But rather costs such as 'sunk costs' that should be ignored (as explained in this week's reading/lecture.) Why did the company include these costs in their decision process? Why did the company make this decision and how did these costs affect the decision? Based on what you have learned in this course, what advice/recommendations would you give the company? Post your answer to the discussion board. 500 words minimum APA Format/submitted to Turnitin.

Paper For Above instruction

In the realm of managerial decision-making, understanding the distinction between relevant and irrelevant costs is crucial. One notable example involves a manufacturing company—let's call it ABC Manufacturing—that recently faced a decision regarding whether to continue production of a discontinued product line. In this scenario, the company included costs that should have been ignored, specifically sunk costs, which are expenses already incurred and cannot be recovered. The decision-making process was clouded by these irrelevant costs, leading to suboptimal managerial choices that could have been avoided with proper economic reasoning.

ABC Manufacturing had invested $500,000 in research, development, and initial production setup for a specific product line. When sales declined, management faced the decision to either continue or discontinue the product. Despite the declining sales and the failure of the product to meet profitability goals, management included the $500,000 sunk costs in their decision process. They believed that abandoning the product would mean wasting this initial investment, and thus, they opted to keep producing the product, even though it was incurring losses.

This decision exemplifies why sunk costs should be disregarded in managerial decision-making. Sunk costs are past expenses that do not influence future cash flows or profitability. Rational decision-making requires focusing on incremental costs and benefits that will be affected by the decision at hand. In this case, the relevant considerations should have been the future variable costs, potential revenues, and the possibility of stopping further losses by discontinuing the product.

The inclusion of sunk costs influenced ABC Manufacturing’s decision by creating an psychological bias called "the sunk cost fallacy," whereby managers feel compelled to continue a project because of the resources already invested. This fallacy often leads to escalation of commitment, resulting in continued losses rather than cutbacks that would minimize future costs and losses.

Applying economic principles learned in this course, I would advise ABC Manufacturing to ignore the sunk costs of $500,000 and instead analyze only the incremental costs and revenues associated with continuing or discontinuing the product line. If the future profits are negative or if discontinuation reduces losses significantly, it would make sense to cease operations related to that product.

Furthermore, the company should establish a decision framework that emphasizes relevant costs and benefits, such as variable costs, potential market demand, and change in cash flows. Managers should be trained to recognize the difference between relevant and irrelevant costs to avoid decision biases stemming from past expenditures. Instituting routine decision checks based on marginal analysis can significantly improve decision quality.

In conclusion, the failure to ignore sunk costs led ABC Manufacturing to make an inefficient decision, ultimately prolonging losses. Effective managerial decision-making must center on relevant, future-oriented costs and benefits, free from biases induced by past investments. Applying these economic principles will help the company allocate resources more efficiently and improve its profitability in the long run.

References

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