Question

Discuss both the quantitative and qualitative factors that managers should consider when making decisions using differential analysis. Apply these factors to a specific example of a decision under consideration.   

Answer 1

Quantitative factors refer to the financial considerations in making a decision using differential analysis. It involves calculation of relevant costs and comparing benefits with costs to make a decision. Relevant costs are the cost which can be avoided if the alternative is not pursued. It also includes opportunity cost of not pursuing another alternative

Qualitative factors refer to the non –financial factors which should be considered in decision making. For example impact on employees, customers, community, etc.

Both quantitative and qualitative factors are equally important in making decision using differential analysis. Below is the example given for application of differential analysis.

Specific example:

Accept an order at a special price

The following quantitative information is needed in decision making whether to accept an order at a special price or not

· Variable manufacturing costs – Direct material, direct labor and variable manufacturing overheads – Existing and any increase expected due to the special order acceptance

· Incremental variable costs incurred for special order- shipping fees, selling and distribution expenses.

· Any incremental cost incurred for special order. For example: cost of dies, moulds, tools, etc which has no value after special order sales servicing.

If there is incremental profit (Special order sales value – Incremental variable costs and specific cost) from special order the order should be accepted else it is rejected.

Fixed cost is not relevant for evaluation of the special order since it is a sunk cost and not relevant in decision making.

The following qualitative information should be considered in decision making whether to accept a special order or not

· Whether special order is one time or will lead to future regular orders

· Price cut affect on market

· Competitor pricing

· Impact on the quality of the product

· Impact on demand for regular product

· Customer perception on price cut

· Any other better alternative availability