Chapter 19

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.

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Learning Outcomes

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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Chapter Summary

  • 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 ...

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