4.3 Qualitative Factors Outweighing Quantitative decisions

 

Two methods of decision making are based on quantitative and qualitative approach. Quanitative approach uses mathematical calculation based on profit or spent cost differences in a managerial accounting method such as differential analysis, whereas qualitative decision uses relatively subjective analysis which doesn’t use numerical calculation but has other substantial influence on the collected data (Thomas, 2018) outweighing the quantitative decision. There exist three naturally important non-financial qualitative factors for managements of customers to make decision which include the morale of all persons in a company or morale of owners  managers and employees, quality of product or service, and the supplier’s reliability for on time goods or service delivery (Kelly, n.d.). To make a very good conclusion, this discussion chose to start from the two last or third and second factors contributing to the most important one.

As the last or third important factor, reliability means the company’s ability to supply well-qualified product or service on time (Anonimous, 2021) or fastest time in my own opinion. Time discipline or on time habits in general is required in all sectors including business and non-business activities. Our costumer will be unable to fulfil the next job on time due to our delay on service or product supplies. If the customer is also a supplier for the next customer, the same thing will happen in such a way that all parties around will be negatively affected. Therefore, in this situation all parties will tend to find the one having best record of reliability no matter how costly they need to pay the best one. This reliability in other words is the other side’s value of the suppliers letting them have a very good reason to be outsourced.  Another different case example is ability of a pilgrimage company to give the first specially prioritized and constitutionally legalized visa which has no need to wait or without waiting for 10-15 years of regular pilgrimage service offered by almost pilgrim companies. Regular visa costed around $ 2795.64 and the special visa costed around $ 50000. Based on quantitative cost difference, people will not choose the special visa. However, due to the fastest time offered, they tend to find more ways to buy it so that they can go to mecca and perform the pilgrimage without waiting for a long time.  

As the second important factor, giving the best satisfaction from the services or supplied products to all customers sometime will make the customers come and come again to the supplier no matter how extremely unbelievable expensive the expense is. For example, the most highly skillful barber shop service supplier supported with digital database technology on the old and modern hair styles having well diverse hair stylists from all over the world well trained with the company’s state of the art technology of hair cutting machines will hang in the situation giving high cost of service and does not worry about losing customers since the service has no competitors. Therefore, in this situation the quantitative cost comparison between the available barber shops are outweighed.

In order of importance, People’s moral are the first and most important factor for customer’s consideration to choose the best supplier. Morale or personality (Anonimous, 2021) in this discussion is overall outlook, attitude and satisfaction of the employees in their association of working in any supplier’s organization or business. Very good morale of all persons - the owners, managers and employers of the suppliers can make them feel mutualistic and full of happiness during their cooperative activities making them easily happy to work and gain synergy on presenting the second and third factors which are supplying the best product or service and being reliable to supply them on fastest time. On justification, the supplier which has very good morale cultures will gain the highest trust based on the addition of the best trusted product or service and the best trusted on time supplies. In conclusion, this aggregated qualitative factor is the one mostly outweighing the quantitative decision.

         

References

Kelly, R. (n.d.). Short Term Decision Making. Education Training. Retrieved October 1, 2021, from https://www.cpaireland.ie/CPAIreland/media/Education-Training/Study%20Support%20Resources/F2%20Management%20Accounting/Relevant%20Articles/f2mashort-term-decision-making.pdf.

 THOMAS, D. K. O. S. H. Y. (2018, January 19). Qualitative & Quantitative Decision making. LinkedIn. Retrieved September 30, 2021, from https://www.linkedin.com/pulse/20140920165433-34529931-qualitative-quantitative-decision-making.

 Anonimous. (2021). Read "high-purity chromium metal: Supply issues for gas-turbine superalloys" at nap.edu. National Academies Press: OpenBook. Retrieved October 1, 2021, from https://www.nap.edu/read/9248/chapter/8.

Anonimous. (2021, July 15). Employee morale: Definition, affecting factors, and how to boost morale. QuestionPro. Retrieved October 1, 2021, from https://www.questionpro.com/blog/employee-morale/.

 

 

4.2.B Decision To Buy Or Make New Engines Based On Differential Analysis

In a way to navigate the strong decision, we used the method of the so called differential analysis. There exists some terms in the differential analysis calculation for decision to buy or make new engines  including sales revenue, variable cost, contribution margin, direct fixed cost, allocated fixed cost, and profits (Saylor, n.d). The choice of the best alternative will be based on keeping to make own engines or buying from other companies with such costs and revenues giving the highest profit. In reality, suppose we have an information of a vacuum manufacturer preparing for the following cost data to manufacture one of components of the vacuum engines:

1.     Sales revenue

-        Annual production units (revenues in unit of sales) : 50000

-        Sell price per unit : $150

-        Total annual sale revenues : Annual production unit * sell price per unit =$150 / unit * 50000 units = $7,500,000

 

2.     Variable cost (CFO, n.d.)

-        Annual variable factory overhead : $7.5 / unit * 50000 units = $375,000

-        Total annual variable cost               : $375,000

 

3.     Contribution margin                                 : Sales revenue – variable cost

: $7,500,000 - $375,000 

: $7,125,000 for 50000 units 

  $7,125,000/50000 units = $142.50 /unit

  (Making)

: $7,500,000 for 50000 units

$7,500,000/50000 units= $150 /unit    (Buying)

 

4.     Direct fixed cost

-        Annual direct labor cost/ annual production unit = $1,200,000 /50000 units = $24 / unit)

-        Fixed factory overhead                       : 150 % * Direct labor cost /unit = 1.5 * $24 / unit =  $36 / unit

-        Annual fixed factory overhead (Cost of making) = $36 / unit * 50000 units = $1,800,000.0

-        Monthly direct materials                    : $75,000

-        Annual direct materials                   : $75,000 * 12 = $900,000 

-        Monthly direct labor                           : $100,000

-        Annual direct labor                          : $100,000 *12 = $1,200,000

-        Total fixed cost (for Making) : $1,200,000 + $900,000 +$1,800,000.0 = $3,900,000.0

-        Annual third party offering cost (Cost of buying) = $60 / unit * 50000 units = $3,000,000.0

 

5.     Allocated fixed cost

-        75 % of the fixed factory overhead representing depreciation, rent, salaries of executives and taxes does not change with respect to any made decision

-        Total annually allocated fixed cost : 75 % *  $1,800,000.0 : $1,350,000.00

Further decision can be continued by using the following analytical table,

Based on table 1, we can determined relevant and and not relevant financial information for our differential analysis based on the same or different values they have in the available two alternatives (Chauvin, 2014). The same values considered irrelevant or not differentiable for our differential analysis are sales revenue having the same value of $7,500,000, and allocated fixed costs having the same value of $1,350,000.00, while the different values considered relevant or differentiable for our differential analysis are total variable costs, contribution margin, direct labor, direct material, fixed factory overhead, total direct fixed cost, and profits. The incremental values of the different ones can be clearly seen in table 1.           

Based on the results in table 2 showing the summary of the results for making new engines, we can conclude that the vacuum manufacturer should buy new engines rather than making the new ones due to fact that besides the total variable and direct fixed costs of making is greater than those of buying, the profit of buying the new engines is greater than that of making new ones and we lose ($1,275,000) if we choose to make new ones.

 

References

Saylor. (n.d.). Customer Decisions. Customer decisions. Retrieved September 28, 2021, from https://saylordotorg.github.io/text_managerial-accounting/s11-04-customer-decisions.html.

CFO. (n.d.). Variable cost definition: Variable costs and decision-making. The Strategic CFO iCal. Retrieved September 29, 2021, from https://strategiccfo.com/variable-cost/.

Chauvin, C. L. (2014). Chapter 10: Differential Analysis (or Relevant Costs). Lumen Managerial Accounting. Retrieved September 30, 2021, from https://courses.lumenlearning.com/sac-managacct/chapter/criteria-used-in-managerial-decision-making/.

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 Official solution :

 

 

4.2.A Decision To Buy Or Make New Engines Based On Differential Analysis

 

In a way to navigate the strong decision, we used the method of the so called differential analysis. There exists some terms in the differential analysis calculation for decision to buy or make new engines  including sales revenue, variable cost, contribution margin, direct fixed cost, allocated fixed cost, and profits (Saylor, n.d). The choice of the best alternative will be based on keeping to make own engines or buying from other companies with such costs and revenues giving the highest profit. In reality, suppose we have an information of a vacuum manufacturer preparing for the following cost data to manufacture one of components of the vacuum engines:

1.     Sales revenue

-        Annual production units (revenues in unit of sales) : 50000

-        Sell price per unit : $150

-        Total annual sale revenues : Annual production unit * sell price per unit =$150 / unit * 50000 units = $7,500,000

 

2.     Variable cost (CFO, n.d.)

-        Monthly direct materials                    : $75,000

-        Annual direct materials                   : $75,000 * 12 = $900,000  

-        Monthly direct labor                           : $100,000

-        Annual direct labor                          : $100,000 *12 = $1,200,000

-        Annual variable factory overhead : $7.5 / unit * 50000 units = $375,000

-        Total annual variable cost               : $2,475,000

 

3.     Contribution margin                                 : Sales revenue – variable cost

: $7,500,000 - $2,475,000  

: $5,025,000 for 50000 units  

  $5,025,000/50000 units = $100.50 /unit

   (Making)

: $7,500,000 for 50000 units

  $7,500,000/50000 units= $150 /unit (Buying)

 

4.     Direct fixed cost

-        Annual direct labor cost/ annual production unit = $1,200,000 /50000 units = $24 / unit)

-        Fixed factory overhead                       : 150 % * Direct labor cost /unit = 1.5 * $24 / unit =  $36 / unit

-        Annual fixed factory overhead (Cost of making) = $36 / unit * 50000 units = $1,800,000.0

-        Annual third party offering cost (Cost of buying) = $60 / unit * 50000 units = $3,000,000.0

5.     Allocated fixed cost

-        75 % of the fixed factory overhead representing depreciation, rent, salaries of executives and taxes does not change with respect to any made decision

-        Total annually allocated fixed cost : 75 % *  $1,800,000.0 : $1,350,000.00

Further decision can be continued by using the following analytical table,

Based on table 1, we can determined relevant and and not relevant financial information for our differential analysis based on the same or different values they have in the available two alternatives (Chauvin, 2014). The same values considered irrelevant or not differentiable for our differential analysis are sales revenue having the same value of $7,500,000, and allocated fixed costs having the same value of $1,350,000.00, while the different values considered relevant or differentiable for our differential analysis are total variable costs, contribution margin, direct fixed cost, and profits. The incremental values of the different ones can be clearly seen in table 1.           

Based on the results in table 2 showing the summary of the results for making new engines, we can conclude that the vacuum manufacturer should buy new engines rather than making the new ones due to fact that besides the variable cost of making is higher and although direct fixed cost of making is less than those of buying, the profit of buying the new engines is greater than that of making new ones and we lose ($1,275,000) if we choose to make new ones.

 

References

Saylor. (n.d.). Customer Decisions. Customer decisions. Retrieved September 28, 2021, from https://saylordotorg.github.io/text_managerial-accounting/s11-04-customer-decisions.html.

CFO. (n.d.). Variable cost definition: Variable costs and decision-making. The Strategic CFO iCal. Retrieved September 29, 2021, from https://strategiccfo.com/variable-cost/.

Chauvin, C. L. (2014). Chapter 10: Differential Analysis (or Relevant Costs). Lumen Managerial Accounting. Retrieved September 30, 2021, from https://courses.lumenlearning.com/sac-managacct/chapter/criteria-used-in-managerial-decision-making/.

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Chapter 7 (A. part 4, and B part 1)

Chapter 7 (A. Writing algebraic expression part 3)

Chapter 7 (A. Writing Algebraic Expression Part 2)

Chapter 7 (A. Writing algebraic expression part 1)