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Horngren'S Financial And Managerial Accounting
Found in: Page 1406

Short Answer

What are the two keys in short-term decision making?

The two keys in short-term decision making are:

  • Revenues, costs, and profits.
  • Utilization of contribution margin approach.
See the step by step solution

Step by Step Solution

Step 1: Meaning of Business

The term business refers to an entity established by law through the association of individuals or groups with an intent to perform ethical commercial activities for generating revenues and profits.

Step 2: The keys in making short-term decisions

In short-term decision-making, the two keys are as follows:

  1. The administration should concentrate on the relevant revenues, profits, and costs. Irrelevant information should not be considered because it increases the amount of information and creates an unnecessary load on the managers.
  2. In addition, the managers should use the contribution margin approach to separate the variable and fixed costs because both the costs behave differently and, therefore, should be analyzed accordingly.

Most popular questions for Business-studies Textbooks

Snappy Plants operates a commercial plant nursery where it propagates plants for garden centers throughout the region. Snappy Plants has $5,100,000 in assets. Its yearly fixed costs are $650,000, and the variable costs for the potting soil, container, label, seedling, and labor for each gallon-size plant total $1.90. Snappy Plants’s volume is currently 500,000 units. Competitors offer the same plants, at the same quality, to garden centers for $4.25 each. Garden centers then mark them up to sell to the public for $9 to $12, depending on the type of plant.

Requirements

1. Snappy Plants’s owners want to earn a 11% return on investment on the company’s assets. What is Snappy Plants’s target full product cost?

2. Given Snappy Plants’s current costs, will its owners be able to achieve their target profit?

3. Assume Snappy Plants has identified ways to cut its variable costs to $1.75 per unit. What is its new target fixed cost? Will this decrease in variable costs allow the company to achieve its target profit?

4. Snappy Plants started an aggressive advertising campaign strategy to differentiate its plants from those grown by other nurseries. Snappy Plants does not expect volume to be affected, but it hopes to gain more control over pricing. If Snappy Plants has to spend $105,000 this year to advertise and its variable costs continue to be $1.75 per unit, what will its cost-plus price be? Do you think Snappy Plants will be able to sell its plants to garden centers at the cost-plus price? Why or why not?

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