A performance report and budgets allows decision makers to clearly see the performance trade offs between alternative spending plans, and, thus, make more informed resource allocation decisions. Budget and performance reports can be used in decision making in various ways. Here Rodolfo has to decide which option is good for his company, manufacturing computer controlled laser lathe (high tech method) , representing manufacturer in Norway or selling coated furniture (current method).
If there are various options to choose from, the option which has potential to generate maximum profit is selected. Budget helps the company in estimating the expected revenue and expenditure and hence the profit from a particular option. Speaking about budgets, Rodolfo can project labor hour required, product cost and expected revenue. This information can be obtained from budget. This will help them in assessing profitability. In case of all three options available to Rodolfo, he can assess the net revenue; he can expect and decide which option will be more fruitful for them.
In the case of performance report, a project which is expected to maximize profit is not necessarily the best option. It depends on the risk involved, cost involved and other factors also. Performance report helps the company in comparing the options on various parameters. In the case of Rodolfo, the income information provides comparative figures of expected profit from three options. If Rodolfo decides to sell coated furniture, profit before tax will be $46,157, if computer controlled laser lathe is used, income would be $213,318 and if he decides to be a representative of Norway’s manufacturer, net income will be $65,141. Looking at the figures one can say that using computer controlled lathe to manufacturer is the best option. But this option requires an investment and Rodolfo should consider the investment involved and the interest to be paid on the loan to fund the investment, before...
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