Give A Numerical Example Of Non-Routine Decision Making

Give A Numerical Example Of Non Routine Decision Determine The Re

Analyze a non-routine decision by examining a specific numerical example to illustrate the relevant costs involved and the qualitative and quantitative analyses necessary for decision-making. Non-routine decisions are exceptional and infrequent, often requiring careful evaluation of specific circumstances, costs, and benefits. This process involves identifying relevant costs, which are costs that will change as a result of the decision, and distinguishing them from irrelevant costs. Quantitative analysis involves calculating these costs to compare options and predict outcomes, such as cost savings or additional expenses. Qualitative analysis considers factors like employee morale, customer satisfaction, or strategic alignment that are not easily quantified but are critical for a comprehensive decision.

Sample Numerical Example of a Non-Routine Decision

Suppose a manufacturing company, Alpha Manufacturing, is evaluating whether to accept a special one-time order from a customer at a discounted price. The company normally produces 10,000 units per month at a unit cost of $20, which includes $12 variable costs and $8 fixed overhead allocated per unit. The customer offers to buy 2,000 units at $15 per unit. The decision hinges on whether accepting the order will be profitable.

The relevant costs in this scenario include the additional variable costs incurred in producing the extra units, primarily raw materials, labor, and additional variable manufacturing expenses. Fixed costs, such as rent and salaries, generally remain unchanged in the short term and are thus considered irrelevant. Given that the variable cost per unit is $12, the total variable cost for 2,000 units is $24,000.

The analysis involves comparing the incremental revenue from the order with the relevant costs. The revenue from the order would be 2,000 units x $15 = $30,000. Since the variable costs are $24,000, the contribution margin from this order would be $6,000, which contributes toward fixed costs and profit. The fixed costs remain unchanged whether or not the order is accepted, which makes them irrelevant for this decision.

From a qualitative perspective, accepting the order might impact current customer relationships if the discount sets a precedent for lower prices. It could also create capacity constraints, limiting the company's ability to fulfill regular orders at standard prices. Conversely, it might lead to increased production efficiency or use idle capacity, making the order beneficial.

In conclusion, based on the quantitative analysis, the company should accept the order as it provides a positive contribution margin of $6,000. However, qualitative aspects such as maintaining pricing policies and customer perceptions should also be considered before making a final decision.

Summary

This example demonstrates how relevant costs are identified and used for decision-making in non-routine scenarios. The process involves focusing on incremental costs and benefits, performing straightforward comparison calculations, and incorporating qualitative factors to arrive at an informed choice.

References

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