Question

1. Quantitative factors vs Qualitative factors, how useful are these two factors in decision making and what is the differences?

2. In a case of make-or-buy decision when there is an alternative uses for capacity, what is the significant of the opportunity cost in the decision of either to make or buy?

3. What is Cost Function? And how it can be used to calculate total cost?

4. What is the most important assumption frequently made in cost behavior estimation?

Answer 1

Answer 1:

Quantitative factors are those factors which includes the numerical results of a product. By analyzing these factors, the owner can determine its performance. For example: There has been an increase in consumption of a commodity by 70%.

Whereas Qualitative factors are those factors which cannot be numerically expressed but are essential for the business growth. For example: Factors like, company's goodwill, suppliers' trustworthiness, etc.

Decision making is an art of combining both the Quantitative factors and Qualitative factors to decide what is best for the business.

For example: Owners of business may find out that the level of customer satisfaction towards a specific product has been tremendous as well as there has been a significant increase in the demand of that product by 80%, So they may decide to increase the production of that particular commodity as it is good for the business growth.

Differences between Quantitative and Qualitative factors

Method of analysis: Qualitative functions uses feedback forms, or interviewing customers at the point of sale. Whereas, quantitative methods use statements such as balance sheet, ratio- analysis to determine the results.

Input differences: In order to determine the results Qualitative methods uses feedback forms, transcripts, etc. to get customer’s input. Whereas Quantitative methods use numerical data as their input.

Complexity: Qualitative factors can easily be determined. But quantitative factors involve more complex calculations.

Answer 2:

Make or buy decision is an act of making choice whether to produce any product internally or to buy that for an outside supplier. Whichever method is more profitable is regarded as a primary method to the business.

Opportunity cost of any good is the next best alternative good that is given up to produce this good. The opportunity cost arises because of the problem of scarcity of resources and the fact that resources have alternative uses. Its significance is make or buy decision is that after considering the opportunity cost if business finds that making that product is not as profitable rather if those particular resources are applied to any alternative use, they might go for buy that product or vice-versa.

Answer 3:

Cost function is used to determine the cost curves by the companies. Cost function is derived from the formula to depict how production expenses will change at different output levels. It estimates the total cost of production given a specific quantity produced.

Total cost can be calculated with the help of cost function as,

Cost function is equal to fixed cost (FC) plus variable cost for given no. of output(x), i. e.

C(x) = FC + VC(x)

Total cost refers to total obligation incurred by the firm in producing any given quantity of output.

Answer 4:

Cost behavior is how the cost of the product responds to changes in production or sales volume. Such costs which do not responds to the changes is called fixed cost and which responds to the changes in called the variable cost.

Assumptions:

The most important assumption made to cost behavior is that there are two types of costs which are comprised of the total cost, namely fixed costs and the variable cost. Any fluctuation in these costs results in change of the total cost.