To build a decision model for Huron Corporation, you’ll need to gather data and analyze it to determine the best course of action for the company.
First, you’ll need to create a schedule of cost of goods manufactured and a schedule of cost of goods sold based on the information provided in Problem #3-50 in your textbook. This will give you a clear picture of the costs involved in producing and selling the company’s products.
Next, you’ll need to consider the two alternative actions that are being considered by company management: purchasing additional factory equipment and reducing the number of production supervisors. For each action, you’ll need to consider the potential impact on the company’s net income. For example, the additional factory equipment would increase annual depreciation by $35,000, which would decrease the company’s net income. On the other hand, reducing the number of production supervisors would result in an indirect cost savings of $40,000, which would increase the company’s net income.
You’ll also need to take into account the two relevant events that can happen and their likelihood of occurrence. One example is that there’s a 50% chance of sales revenues increasing by 18%. The other half has a probability that they will decline by 12%. You’ll need to consider how these events might affect the company’s net income, depending on the alternative actions that are chosen.
Once you’ve taken all of these factors into account, you’ll be able to determine the possible outcomes given the various actions and events, and calculate the expected value of each possible outcome. Based on how likely each outcome is, the expected value measures the outcome. A company should choose the course of action with the greatest expected value.
Finally, you’ll need to communicate your findings in writing and verbally, to Company management. It’s important to clearly and effectively communicate the results of your analysis and explain how your conclusions can be used to improve the company’s net income.