¶ … Relationships
The manager's decision-making prerogatives are set by the organization's objectives. Guillermo Furniture is at a crossroads. The decisions with which the manager is presently faced are strategic in nature, impacting every aspect of the company's operations. We shall assume that maximizing profit is one of the most important objectives, if not the most important one.
Cost relationships therefore play a critical role in setting decision-making prerogatives. The strategic nature of the decision and the limited resources of the company mean that the decisions are mutually exclusive. The cost relationships will help to dictate the decision. For example, Guillermo could buy the laser lathe. The first relationship that must be considered is the lathe and labor costs. The degree to which the lathe will reduce labor costs is critical to the financial analysis.
Another key relationship is the lathe to sales relationship. Currently, Guillermo has a high-end product. The company may gain new sales from switching to mass production, but it must also consider the impact of that decision on the high-end business. This goes for the decision of whether or not to import as well. As one cost rises, others fall. In order to maximize profit, management must determine the course of action that sees the greater reduction in total costs, related to the greatest increase in revenues.
Variance must also be taken into account. When taking cost relationships into account, the variability of costs helps management understand the stability of cash flows. In instances where there is a relationship between costs, the variability must be understood on a systemic level, as a change in one cost will result in changes to costs throughout the company. Such relationships will amplify the impact of one change, adding volatility to the expected cash flows. Therefore, it is critical that management understand the nature and intensity of cost relationships when making strategic decisions of this magnitude.
