Short-Run Decision Making
Short-Run Decision Making
Short-run decision consists of choosing among alternatives with an immediate or limited end in view. Accepting a special order for less than the normal selling price to utilize idle capacity and to increase this year’s profits is an example. Thus, some decisions tend to be short run in nature and sometimes are referred to as tactical decisions; however, it should be emphasized that short-run decisions often have long-run consequences.
Consider a second example. Suppose that a company is thinking about producing a component instead of buying it from suppliers. The immediate objective may be to lower the cost of making the main product. Yet this decision may be a small part of the overall strategy of establishing a cost leadership position for the firm. Therefore, short-run decisions are often small-scale actions that serve a larger purpose. How does a company go about making good short-run decisions? A decision model, a specific set of procedures that produces a decision, can be used to structure the decision maker’s thinking and to organize the information to make a good decision.
The following is an outline of one decision-making model.
• Recognize and define the problem.
• Identify alternatives as possible solutions to the problem; eliminate alternatives that clearly are not feasible.
• Identify the costs and benefits associated with each feasible alternative. Classify costs and benefits as relevant or irrelevant, and eliminate irrelevant ones from consideration.
• Estimate the relevant costs and benefits for each alternative.
• Assess qualitative factors.
• Make the decision by selecting the alternative with the greatest overall net benefit.
The decision-making model described has six steps. Alternatively, you may find it useful to aggregate them into a shorter list.
For example, you could use a three-step model:
(1) Identify the decision,
(2) Identify alternatives and their associated relevant costs, and;
Short-run decision consists of choosing among alternatives with an immediate or limited end in view. Accepting a special order for less than the normal selling price to utilize idle capacity and to increase this year’s profits is an example. Thus, some decisions tend to be short run in nature and sometimes are referred to as tactical decisions; however, it should be emphasized that short-run decisions often have long-run consequences.
Consider a second example. Suppose that a company is thinking about producing a component instead of buying it from suppliers. The immediate objective may be to lower the cost of making the main product. Yet this decision may be a small part of the overall strategy of establishing a cost leadership position for the firm. Therefore, short-run decisions are often small-scale actions that serve a larger purpose. How does a company go about making good short-run decisions? A decision model, a specific set of procedures that produces a decision, can be used to structure the decision maker’s thinking and to organize the information to make a good decision.
The following is an outline of one decision-making model.
• Recognize and define the problem.
• Identify alternatives as possible solutions to the problem; eliminate alternatives that clearly are not feasible.
• Identify the costs and benefits associated with each feasible alternative. Classify costs and benefits as relevant or irrelevant, and eliminate irrelevant ones from consideration.
• Estimate the relevant costs and benefits for each alternative.
• Assess qualitative factors.
• Make the decision by selecting the alternative with the greatest overall net benefit.
The decision-making model described has six steps. Alternatively, you may find it useful to aggregate them into a shorter list.
For example, you could use a three-step model:
(1) Identify the decision,
(2) Identify alternatives and their associated relevant costs, and;
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