Question

Short runs

Short-run decision making consists of choosing among alternatives with an immediate or limited end in view. Short-term decisions sometimes are referred to as tactical, or relevant, decisions because they involve choosing between alternatives with an immediate or limited time frame in mind.

1. Suppose that a product can be sold at split-off for $5,000 or processed further at a cost of $1,000 and then sold for $6,400. Should the product be processed further?

Answer 1

The short term approach in decision making is to earn profit from the investment or proposal for the short period of time it does not take the longer approach and it's benefits over the longer terms. Sometimes Short term losses may bring potential in future to earn decent income but that logic is not focused in short run decision making.

Here in the given case, the product can be sold off at split off point for $ 5,000, even if it sold at this point it is profitable for the entity, but a proposal is there that if product is processed further with additional cost of $ 1,000 is incurred then the product can be sold at $ 6,400.

So additional cost of $ 1000 will bring the additional revenue of $ 1400 ( 6400 - 5000), thus it is clearly shown that there is benefit of $ 400 if the product is processed further so it is an acceptable proposal.

Based on the given information, the product should be processed further.