Business managers normally use their understanding of cost behavior to make short term business decisions. For instance, managers can have an option to accept an order with special pricing or drop some unprofitable product. Such decisions often pertain to short periods of time. When making short term decisions, the information utilized should be relevant to the decision being made. Short term business decisions involve two key elements; relevant information and relevant costs. Relevant information refers to expected future data that differs with alternatives. On the other hand, relevant costs are costs that are considered relevant to a particular decision. Capital budgeting is also one of the most important decisions managers make. It is used for making decisions regarding long term business decisions. Capital budgeting allows businesses to determine whether a given project is feasible or not. As such, managers carry out capital budgeting to determine whether a capital spending will bring profits to the business. Short term business decisions and capital budgeting are critical decision making process that can help business thrive both in the short term and long term.
Red Duv Aviation can utilize relevant information to make short term decisions regarding its business. For instance, the company may be having three potential engine parts suppliers whose prices differ. The relevant information in this case is the data regarding the pricing and quality of the engine parts supplied by the respective suppliers. The company will determine the quality of the products offered by each of the suppliers, along with their prices. The engine parts that are of the acceptable quality and competitively priced are the ones that will be considered for purchase. This is because Red Duv Aviation seeks to minimize costs, maintain high quality, and increase its profits. This implies that pricing plays a critical role in determine short term business decisions. Managers have to consider three factors when setting prices; the company’s target profit, the price customers are willing to pay, and whether the company is a price setter or price taker. Company’s set profit targets based on the expectations of the stakeholders ( Woerner & Wixom, 2015) . As such, the target profit will be used to determine the price of the products. The prices should enable the company meet its target profits. The managers cannot set prices that are higher than what customers are willing to pay, as sales could decline. Additionally, the prices are determined by whether the company is a price setter or a price taker. Price setters are capable of setting their own prices for products, particularly if the products are unique and the competition is less. On the other hand, companies that are price takers have to use the price set by the market forces.
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Red Duv Aviation managers can also utilize capital budgeting to determine the feasibility of the company’s investments. The investment decisions may include acquisition, expansion, new product, research and development, or replacement. There are several methods used for capital budgeting; payback period, discounted cash flow, and internal rate of return ( de Andrés et al., 2015). Payback period refer to the number of years it will take to recover the initial cost of a given investment. The shorter the payback period, the better the investment is. The method is simple and provides information regarding the risk of the investment. The discounted cash flow method provides the sum of the present values of all the expected cash flows in case the project is undertaken. The internal rate of return method considers the time value of money, as well as all the cash flows of the investment. Essentially, the internal rate of return is the discount rate when the present value of the incremental cash inflows equals the original cost of the investment.
In conclusion, short term business decisions and capital budgeting processes are critical to business success. They help business managers make informed decisions. The module has given me an opportunity to realize that short term business decisions are determined by prices. Making the most appropriate pricing decisions is critical to business success in the short run. I have also learnt that capital budgeting is an important tool for determining the feasibility of projects before they are undertaken. There are several methods for capital budgeting; payback period, discounted cash flows, and internal rate of return. Managers are responsible for making informed business decisions that ensure business success, both in the short and long run.
References
de Andrés, P., de Fuente, G., & San Martín, P. (2015). Capital budgeting practices in Spain. BRQ Business Research Quarterly , 18 (1), 37-56.
Woerner, S. L., & Wixom, B. H. (2015). Big data: extending the business strategy toolbox. Journal of Information Technology , 30 (1), 60-62.
