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Chapter 11: Problem 13

Managers will always choose the alternative that maximizes operating income or minimizes costs in the decision model." Do you agree? Why?

Short Answer

Expert verified
In summary, managers generally aim to maximize operating income and minimize costs to increase profitability. However, they must also consider other factors such as long-term strategic planning, Corporate Social Responsibility, sustainability, and ethical considerations. Consequently, the statement that managers always choose the alternative that maximizes operating income or minimizes costs in a decision model is not entirely accurate, as they need to balance various factors and priorities in different situations.

Step by step solution

01

Define key terms

Begin by defining the key terms, such as "operating income," "costs," and "decision model." Operating income refers to the profit a company makes from its regular business operations, excluding any non-operating income or expenses. Costs are the expenses incurred by a company in producing its goods or services. A decision model is a representation of a problem or situation that helps managers make informed choices through analysis and evaluation.
02

Discuss the general manager mindset

Generally, managers aim to maximize operating income and minimize costs to increase profitability. This is a natural goal for businesses, as it helps ensure financial stability, growth, and competitiveness within the market. In many cases, this is the primary objective of a manager's decision-making process.
03

Consider external factors

However, it's essential to recognize that external factors and other considerations may influence a manager's decision-making process. For example, managers need to balance short-term profitability with long-term strategic planning. This could mean making decisions that don't immediately maximize operating income or minimize costs but will benefit the company in the long run.
04

Discuss corporate social responsibility and sustainability

Additionally, many businesses now prioritize Corporate Social Responsibility (CSR) and sustainability, which are essential factors that can impact decision-making. To contribute positively to society and the environment, managers may choose alternatives that aren't solely driven by maximizing operating income or minimizing costs, but instead create long-term value by addressing social and environmental challenges.
05

Mention ethical considerations

Ethical considerations can also play a role in managers' decision-making processes. A manager might choose not to maximize operating income or minimize costs in situations where doing so would lead to unethical practices, such as compromising employee welfare, damaging the environment, or engaging in socially harmful activities.
06

Conclude

In conclusion, while maximizing operating income and minimizing costs are fundamental objectives for managers, it's not accurate to say that they "always" choose these alternatives in their decision models. Managers need to consider various factors, such as long-term strategic planning, CSR, sustainability, and ethical obligations. Therefore, the statement should be taken as a general guideline but not an absolute rule, as circumstances may require different priorities in different situations.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Operating Income
Operating income is a key financial metric that reflects the profit a company generates from its core business activities. It is critical because it isolates the efficiency of the company鈥檚 core operations, excluding non-operational factors like taxes and interest income. This measure is an essential indicator of financial health, providing insights into how well a company can cover its operational costs. Businesses aim to maximize operating income to ensure
  • Sustained financial stability
  • Profitability and growth
  • Competitive edge in their market
These goals drive many managerial decisions as they directly impact the bottom line and shareholder value. It's about assessing how well a company鈥檚 main activities generate profits, setting the stage for future investments and expansions.
Cost-Analysis
Cost-analysis is a crucial step in decision-making, where managers evaluate all costs associated with different business activities or projects. This process helps in identifying
  • Variable and fixed costs
  • Cost-saving opportunities
  • Budgetary needs
By focusing on minimizing costs, managers can increase net income, ensuring that resources are used efficiently. However, it's not about merely cutting costs but understanding the cost-benefit balance. For instance, cheaper materials might save money but could affect product quality. Thus, comprehensive cost-analysis is essential for making informed choices that support both short-term efficiencies and long-term gains.
Corporate Social Responsibility
Corporate Social Responsibility (CSR) emphasizes a company's obligation to act in ways that benefit society and the environment. This concept shifts the focus from solely financial metrics to broader societal impacts. Through CSR, companies can
  • Build a positive brand reputation
  • Improve customer loyalty
  • Enhance employee satisfaction
This can sometimes mean sacrificing immediate operating income benefits for long-term societal advantages, aligning business practices with ethical standards and social values. It is about finding harmony between profit-making and contributing positively to the community, ensuring sustainable business practices that respect environmental and social boundaries.
Strategic Planning
Strategic planning is the process where managers outline a company鈥檚 direction and set its long-term objectives. This involves making decisions that consider both current and future scenarios, helping businesses to adapt to changing environments. Key elements include
  • Assessing market trends
  • Analyzing competitive landscapes
  • Identifying new opportunities for growth
Strategic planning ensures that while the immediate goal might be maximizing operating income, the long-term vision involves sustainable growth and resiliency against market fluctuations. It guides businesses in aligning their short-term actions with long-term ambitions, factoring in potential risks and rewards.
Ethical Considerations in Management
Ethical considerations in management revolve around making decisions that are not only beneficial for the company but also align with moral and ethical principles. This might involve declining opportunities that could undermine
  • Employee welfare
  • Environmental sustainability
  • Community welfare
Managers often face choices that test their ethical boundaries, where maximizing operating income may lead to negative societal outcomes. Thus, integrating ethical considerations into decision-making ensures respect for stakeholders and mitigates reputational risks, promoting a culture of integrity and corporate responsibility that resonates with all involved aspects of the business.

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Most popular questions from this chapter

(A. Atkinson, adapted) Denver Engineering manufactures small engines that it sells to manufacturers who install them in products such as lawn mowers. The company currently manufactures all the parts used in these engines but is considering a proposal from an external supplier who wishes to supply the starter assemblies used in these engines. The starter assemblies are currently manufactured in Division 3 of Denver Engineering. The costs relating to the starter assemblies for the past 12 months were as follows: Over the past year, Division 3 manufactured 150,000 starter assemblies. The average cost for each starter assembly is \(\$ 10(\$ 1,500,000 \div 150,000)\). Further analysis of manufacturing overhead revealed the following information. \(0 f\) the total manufacturing overhead, only \(25 \%\) is considered variable. \(0 f\) the fixed portion, \(\$ 300,000\) is an allocation of general overhead that will remain unchanged for the company as a whole if production of the starter assemblies is discontinued. A further \(\$ 200,000\) of the fixed overhead is avoidable if production of the starter assemblies is discontinued. The balance of the current fixed overhead, \(\$ 100,000,\) is the division manager's salary. If Denver Engineering discontinues production of the starter assemblies, the manager of Division 3 will be transferred to Division 2 at the same salary. This move will allow the company to save the \(\$ 80,000\) salary that would otherwise be paid to attract an outsider to this position. 1\. Tutwiler Electronics, a reliable supplier, has offered to supply starter- assembly units at \(\$ 8\) per unit. Because this price is less than the current average cost of \(\$ 10\) per unit, the vice president of manufacturing is eager to accept this offer. 0 n the basis of financial considerations alone, should Denver Engineering accept the outside offer? Show your calculations. (Hint: Production output in the coming year may be different from production output in the past year.) 2\. How, if at all, would your response to requirement 1 change if the company could use the vacated plant space for storage and, in so doing, avoid \(\$ 100,000\) of outside storage charges currently incurred? Why is this information relevant or irrelevant?

(CMA, adapted) The Reward One Company manufactures windows. Its manufacturing plant has the capacity to produce 12,000 windows each month. Current production and sales are 10,000 windows per month. The company normally charges \(\$ 250\) per window. cost information for the current activity level is as follows: Reward One has just received a special one-time-only order for 2,000 windows at \(\$ 225\) per window. Accepting the special order would not affect the company's regular business or its fixed costs. Reward One makes windows for its existing customers in batch sizes of 100 windows \((100 \text { batches } \times 100 \text { windows per batch }=10,000\) windows). The special order requires Reward 0ne to make the windows in 25 batches of 80 windows. 1\. Should Reward One accept this special order? Show your calculations. 2\. Suppose plant capacity were only 11,000 windows instead of 12,000 windows each month. The special order must either be taken in full or be rejected completely. Should Reward One accept the special order? Show your calculations. 3\. As in requirement 1, assume that monthly capacity is 12,000 windows. Reward 0ne is concerned that if it accepts the special order, its existing customers will immediately demand a price discount of \(\$ 20\) in the month in which the special order is being filled. They would argue that Reward One's capacity costs are now being spread over more units and that existing customers should get the benefit of these lower costs. Should Reward One accept the special order under these conditions? Show your calculations.

Ace Cleaning Service is considering expanding into one or more new market areas. Which costs are relevant to Ace's decision on whether to expand?

The Denver Corporation manufactures filing cabinets in two operations: machining and finishing. It provides the following information: Each cabinet sells for \(\$ 75\) and has direct material costs of \(\$ 35\) incurred at the start of the machining operation. Denver has no other variable costs. Denver can sell whatever output it produces. The following requirements refer only to the preceding data. There is no connection between the requirements. 1\. Denver is considering using some modern jigs and tools in the finishing operation that would increase annual finishing output by 1,150 units. The annual cost of these jigs and tools is \(\$ 35,000\). Should Denver acquire these tools? Show your calculations. 2\. The production manager of the Machining Department has submitted a proposal to do faster setups that would increase the annual capacity of the Machining Department by 9,000 units and would cost \(\$ 20,000\) per year. Should Denver implement the change? Show your calculations. 3\. An outside contractor offers to do the finishing operation for 10,000 units at \(\$ 9\) per unit, triple the \(\$ 3\) per unit that it costs Denver to do the finishing in-house. Should Denver accept the subcontractor's offer? Show your calculations. 4\. The Hammond Corporation offers to machine 5,000 units at \(\$ 3\) per unit, half the \(\$ 6\) per unit that it costs Denver to do the machining in-house. Should Denver accept Hammond's offer? Show your calculations. 5\. Denver produces 2,000 defective units at the machining operation. What is the cost to Denver of the defective items produced? Explain your answer briefly. 6\. Denver produces 2,000 defective units at the finishing operation. What is the cost to Denver of the defective items produced? Explain your answer briefly.

Which of the following is not a qualitative factor that Atlas Manufacturing should consider when deciding whether to buy or make a part used in manufacturing their product? a. Quality of the outside producer's product. b. Potential loss of trade secrets. c. Manufacturing deadlines and special orders. d.Variable cost per unit of the product.
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