Managers typically make higher quality decisions through understanding the existing situation in detail where data should be utilized to evaluate the situation and after that coming up with an appropriate choice useful for the business. Executives can also make higher-quality decisions by knowing the real blind spot as personal opinions, notions, and beliefs are likely to affect the decision-making process (Schoemaker, Krupp & Howland, 2013). The characters can affect the quality of essential decisions, and the key depends in not allowing these blind spots to interfere the objective decision-making. An example decision made was that of Starbucks growing its global operations and introducing its specialty tea product to India and China e-trading market. The managers made a high-quality decision through going global due to popularity and the love for Starbuck’s products that continue to grow internationally.
The cost function is a numerical method that gives the general cost to produce a given figure of units (Coelli et al., 2013). It is typically denoted by C(x) where x describes a positive number and is usually an integer. For instance, when a business needs to know the total cost of producing 60 units of an item, they will thus plug in 60 for each x in the cost function, and then, utilizing the array of procedures, abridge the phrase to a figure, or dollar, form. The cost function is typically a derived function that is retrieved from the production function that captures the technology of the industry. The theory of cost is a concern of managerial economics that assists in the allocation of funds among various options. The knowledge of this theory is significant for coming up with effective decisions associated with price and output.
The total cost function of producing x tire is described as C(x) =.012x + 5,000
There is the need to find the price of making close to 1500 tires, and this done through plugging in1500 for x and then evaluating the cost function:
C (1500) = .012*1,500 + 5,000 = $5,018 hence the cost is $5,018 for 1,500 tires
Finding the average cost of producing these tires will need the division of the entire cost by the figure of tires which will result in $3.35 to produce each tire
To get the subsidiary price of manufacturing the 1500th tire, take the entire rate of making 1500 tires and take away from that the full price of making 1499 tires.
C (1499) = (.012*1499) + 5000 = $5017.988
Cap in 1499 for x in the initial equation that totals up to $5017.99
$5,018 – $5017.99 = $.01 hence the marginal cost of manufacturing the 1500th tire will be close to 1%
This is an example of how a company manufacturing tires can come up with a detailed decision on the number of tires and the general expenses for the entire process.
Cost-volume-profit evaluation is considered a strategy of cost accounting that focuses on the effects of varying levels of costs and volume together with its impact on the operating cost (Hilton & Platt, 2013). The strategy also evaluates the break-even end for various sales quantity and cost structure that can be advantageous for executives making temporary economic decisions. It creates multiple assumptions with the aim of staying related together with the sales price variable cost and fixed costs per element are constant. An example of how the method is used in decision-making includes:
Imagine that as an investor, there are plans of getting into the construction organization as a panel formwork supplier. The likely number of forthcoming projects, the company projected that within two years, the fixed cost of producing formworks is Rs. 200,000. The variable number cost for creating one panel is Rs. 15 and the sale price for every group to be Rs. 25. Therefore, the calculations will try and get the number of panels that should be sold for the organization to start getting profits.
Breakeven in Units = Total Fixed Cost / (price – variable cost)
= 200,000 / (25 – 15)
Coelli, T. J., Gautier, A., Perelman, S., & Saplacan-Pop, R. (2013). Estimating the cost of improving quality in electricity distribution: A parametric distance function approach. Energy Policy, 53, 287-297.
Hilton, R. W., & Platt, D. E. (2013). Managerial accounting: creating value in a dynamic business environment. McGraw-Hill Education.
Schoemaker, P. J., Krupp, S., & Howland, S. (2013). Strategic leadership: The essential skills. Harvard business review, 91(1), 131-134.