Short-term decision making
‘So there I was, fresh from the annual meeting of the Society for Judgement and Decision Making, and behaving like Buridan's Ass – the imaginary creature which starved midway between two troughs of hay because it couldn't decide which to go for.’
Source: Peter Aytan, Ditherer's Dilemma, New Scientist, 12 February 2000, p. 47.
After completing this chapter you should be able to:
- Explain the nature of short-term business decisions.
- Understand the concept of contribution analysis.
- Investigate some of the decisions for which contribution analysis is useful.
- Draw up break-even charts and contribution graphs.
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- In business, decision making involves choosing between alternatives and involves looking forward, using relevant information and financial evaluation.
- Businesses face a range of short-term decisions such as how to maximise limited resources.
- It is useful to distinguish between costs that vary with production or sales (variable costs) and costs that do not (fixed costs).
- Revenue less variable costs equals contribution.
- Contribution less fixed costs equals net profit.
- Contribution and contribution per unit are useful ...