Exhibit 12-1
Five-Step Decision-Making Process for Precision Sporting Goods
The details of the five steps depicted in the flow chart are as follows:
Step 1 is to identify the problem and uncertainties.
The information of Step 1 is as follows:
Should Precision Sporting Goods reorganize its manufacturing operations to reduce manufacturing costs? An important uncertainty is how the reorganization will affect employee morale.
Step 2 is to obtain information.
The information of Step 2 is as follows:
Historical hourly wage rates are $14 per hour. However, a recently negotiated increase in employee benefits of $2 per hour will increase wages to $16 per hour. The reorganization of manufacturing operations is expected to reduce the number of workers from 20 to 15 by eliminating all 5 workers who handle materials. The reorganization is likely to have negative effects on employee morale.
Step 2 results in historical costs and other information which lead to step 3.
Step 3 is to make predictions about the future.
The information of Step 3 is as follows:
Managers use information from Step 2 as a basis for predicting future manufacturing labor costs. Under the existing do-not-reorganize alternative, costs are predicted to be $640,000 (20 workers multiplied by 2,000 hours per worker per year multiplied by $16 per hour), and under the reorganize alternative, costs are predicted to be $480,000 (15 workers multiplied by 2,000 hours per worker per year multiplied by $16 per hour). Recall, the reorganization is predicted to cost $90,000 per year.
Step 4 is to make decisions by choosing among alternatives.
The information of Step 4 is as follows:
Managers compare the predicted benefits calculated in Step 3 ($640,000 minus $480,000 is equal to $160,000) that is, savings from eliminating materials-handling labor costs, 5 workers multiplied by 2,000 hours per worker per year multiplied by $16 per hour is equal to $160,000) against the cost of the reorganization ($90,000) along with other considerations (such as likely negative effects on employee morale). Management chooses the reorganize alternative because the financial benefits are significant and the effects on employee morale are expected to be temporary and relatively small.
Step 5 is to implement the decision, evaluate performance, and learn.
The information of Step 5 is as follows:
Evaluating performance after the decision is implemented provides critical feedback for managers, and the five-step sequence is then repeated in whole or in part. Managers learn from actual results that the new manufacturing labor costs are $540,000, rather than the predicted $480,000, because of lower-than-expected manufacturing labor productivity. They also learn about the effects on employee morale. This (now) historical information can help managers make better subsequent predictions. Managers will also try to improve implementation via employee training, increased employee engagement, and better supervision.