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Accounting and finance for
managers: a decision-making
approach
Chapter 10:
Operational decisions
Learning outcomes

After studying this chapter, the reader will be able
to:
 Assess the financial consequences of a range of
decision-making situations.
 Define the scope and limitations of the financial
techniques applied.
Topics covered
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Setting sales targets.
Predicting the impact of price changes.
Outsourcing vs in-house operation/production.
Operational restructuring/automation of business
processes.
Closing a business segment.
Dropping a product/service line.
Operational decision-making
Step 1: define
the problem
Step 2: identify
feasible
alternatives
Step 3: identify
costs and
benefits
Step 4:
qualitative
factors
Step 5: select
best alternative
Cost–volume–profit analysis (CVP)
Cost–volume–profit analysis is the study
of the interrelationship between costs and
revenues (and therefore profit) at various
levels of activity.
Revenue behaviour
Fixed costs
Variable costs
Total costs
Total revenue and total costs
Break-even point
Break-even point (in units) =
Fixed costs
.
Contribution per unit
Margin of safety
Evaluation of the CVP technique
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CVP analysis ignores price elasticity of demand and
economies of scale.
CVP analysis focuses on the short term.
CVP analysis usually assumes a single product.
CVP analysis assumes simple, single-stage manufacturing
CVP analysis assumes that costs can be categorized into
either variable or fixed.
CVP analysis assumes that the forces influencing a business
are static rather than dynamic.
Relevant costing
The relevant costs for decision-making are
those future costs that will be affected by
the decision. Costs that are independent of
the decision are not relevant and should
not be considered when making that
decision.
Relevant costing
Opportunity cost

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A measure of the opportunity that is lost or
sacrificed when the choice of one course of
action requires that an alternative course of
action be given up.
An opportunity cost is always measured
financially in terms of lost contribution.
(Contribution = Sales revenue − Variable costs)
The consideration of qualitative factors in
outsourcing
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Redundancies
Employee morale
Reliance on suppliers
Production flexibility
Ability to meet customer requirements
Control over quality
The shutdown decision: deleting a
business segment
A business ‘segment’ could be a:
 product;
 type of customer;
 geographic region;
 distribution channel; or
 any other identifiable part of a business.
Relevant costing: summary
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When decision-making, only relevant costs should be
considered. Any costs deemed not to be relevant
should be ignored.
Relevant costs are those future costs that will be
changed by a particular decision. This may include
opportunity costs.
Whether any given cost is relevant will depend upon
the situation.
The time horizon chosen will impact upon what costs
become relevant for a given situation.