Perform incremental analysis for special order decisions.

LO 3 Perform incremental analysis for special order decisions.

E VALUATE

(pp. 1115–1117)

Examine each short-run decision LO and how it affected the 4 Perform incremental analysis for segment profitability organization.

decisions. (pp. 1118–1120)

∇∇ Identify and prescribe corrective action.

LO 5 Perform incremental analysis for sales mix decisions involving

constrained resources. (pp. 1120–1123)

C OMMUNICATE

LO 6 Perform incremental analysis for sell or process-further

∇ Prepare reports related to short-run

decisions. (pp. 1123–1125)

decisions throughout the year.

DECISION POINT 씰 A MANAGER’S FOCUS

씰 How do managers at Bank of

BANK OF AMERICA America decide on new ways to

increase business and protect customers’ interests?

Bank of America is one of the world’s largest financial institutions. 씰 How can incremental analysis It serves large corporations, small and mid-sized businesses, gov-

help managers at Bank of ernments, institutions, and individuals in over 150 countries. In the

America take advantage of the business opportunities that

United States alone, it serves approximately 53 million individu- online banking offers? als and small businesses. The bank has received numerous awards

for online customer satisfaction and for its initiatives in preventing online fraud and identity theft. In 2009, more than 29 million of its customers did their banking online.

Managers at Bank of America believe the trend to online com- merce is good for business. As customers gain confidence in deal- ing with their finances over the Internet, the bank’s managers plan to offer more online products and services. In their quest to find safe and innovative ways to meet the needs of customers, managers at Bank of America make short-run decisions that affect the bank’s prof- its, resources, and opportunities to increase online banking.

CHAPTER 24 Short-Run Decision Analysis

Short-Run Decision Many of the decisions that managers make affect their organization’s activities in Analysis and the

the short run. Those decisions are the focus of this chapter. In making short-run

Management decisions, managers need historical and estimated quantitative information that

is both financial and nonfinancial in nature. Such information should be relevant,

Process

timely, and presented in a format that is easy to use in decision making. Short-run decision analysis is the systematic examination of any decision

whose effects will be felt over the course of the next year. The decision analysis make short-run decisions using

LO 1 Describe how managers

must take into account the organization’s strategic plan and tactical objectives, incremental analysis.

the related costs and revenues, as well as any relevant qualitative factors. Although many business problems are unique and cannot be solved by fol- lowing strict rules, managers frequently take four predictable actions when mak- ing short-run decisions:

1. Discover a problem or need.

2. Identify all reasonable courses of action that can solve the problem or meet the need.

3. Prepare a thorough analysis of each possible solution, identifying its total costs, savings, and other financial effects, as well as any qualitative factors.

4. Select the best course of action. Later, managers review each decision to determine whether it produced the

forecasted results by examining how it was carried out and how it affected the organization. If results fell short, they identify and prescribe corrective action. This postdecision audit supplies feedback about the results of the short-run deci- sion. If the solution is not completely satisfactory or if the problem remains, the management process begins again.

In the course of a year, managers may make many short-run decisions, such as whether to make a product or service or buy it from an outside supplier, whether to accept a special order, whether to keep or drop an unprofitable segment, and whether to sell a product as is or process it further. If resources are limited, they may also have to decide on the most appropriate product mix. In making such decisions, managers analyze not only quantitative factors relating to profitability and liquidity; they also analyze qualitative factors. For example, the qualitative fac- tors a bank might consider when deciding whether to keep or eliminate a branch location include the following:

씰 Competition (Do our competitors have a branch office located here?) 씰 Economic conditions (Is the community growing?) 씰 Social issues (Will keeping this branch benefit the community we serve?) 씰 Product or service quality (Can we attract more business because of the

quality of service at this branch?) 씰 Timeliness (Does the branch promote customer service?) Managers must identify and assess the importance of all such qualitative factors,

as well as quantitative factors, when they make short-run decisions.

Short-Run Decision Analysis and the Management Process