Question

Decision making is the selection of the correct cost element and take the right decision in the best interest of the organization be: -

-Make or buy decision

-Accept or reject decision

-Shut down decision

-Limiting factor decision

In relation to Decision making explain the above statement.

Your assignment, should include limiting factor with several constraint and making use of linear programing technique

Word limit: 1500-2000

Answer 1

One of the basic function of management is to make decisions. Decision making process generally involves selecting a course of action from among various options. Some of the important areas are:

1) Make or Buy Decisions:

Sometimes a manufacturer has to decide as to whether a certain component or spare parr shiuld be manufactured or bought from the market. While making such decision the marginal cost of the component or spare part should be compared with the market price. If the marginal cost is lower than the market price, the component must be manufactured in factory. But one must also consider increase in fixed costs or any other limitijg factor. If purchase price is lower than the marginal cost and provided regular supply and proper characteristics then its better to buy from outside.

2) Accept or Reject a Decision:

Sometimes a manufacturer intends to add a new product so the manufacturer must check whether it is capable of contributing something towards fixed costs and profit after meeting variable cost of sales.

A firm engaged in supplying goods in the home market and havibg surplus production capacity may think of utilising it to meet export order at a price lower than that prevailing in the home market. Such a decision is made only when local sale is earning a profit, when it fixed costs have ready recovered by the local sales.

3) Shut down decison:

In case of multi product concern it may be found that the production of some of its units is at loss. So the production os non profitable products shall have to be discontinued. The decision shall be taken with reference to the amount of contribution or P/V ratio. Production of the product giving the least amount of profitability should be discontinued.

4) Limiting factor decision:

It is also known as key factor which limits production and sales and thus prevents the manufacturing concern from earning unlimited profits. The limiting factors may be shortage of raw material, shortage of skilled labour and machine operator, market for sales. Selection of the profitable product must be made on the basis of the contribution per unit.

Profitability = Contribution/ Limiting factor per unit

Linear Programming is an optimization technique. A technique for specifying how to use limited resources or capacities of a business to obtain a particular objective, such as least cost when those resources have alternate uses.