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Techniques of Decision-making

(a)    Break-even technique:

It helps managers determine that level of output at which total costs (variable costs and fixed costs) and total revenue are the same. Total profit at this volume called the break-even point is zero. It helps managers analyze the economic risibility of a proposal. For any level of output, the amount of profit can be ascertained which serves as acceptance/ rejection criterion of the proposal. It is only a rough estimate of assessing a project since it assumes a constant selling price and fixed cost which is not always so.

(b)    Inventory models :

Firms carry enough inventories with them so that they do not run out of stock. Though this ensures regular supply of goods to customers, they incur costs to carry the inventory like handling costs, insurance costs, opportunity cost of money tied in the inventory etc. These are known as carrying costs. In order to reduce these costs, firms keep minimum inventory in store and order fresh inventory when they need. This will reduce the carrying cost of inventory but the ordering cost will go up. These are the costs of placing an order and include cost of preparing an order and cost of receiving and inspecting the goods. Both the carrying and ordering costs operate in reverse detection. Increase in one means decrees in the other. Sophisticated inventory models are available for management of inventory. They place order for goods t the point where total of ordering costs and carrying costs is the least.

(c)    Linear programming:

It is a technique of resource allocation that maximizes output or minimizes costs through optimum allocation of resource. It is applies when resources are scarce and have to be optimally utilized so that output can be maximized out of limited resources. Linear programming is “a quantitative tool for planning how to allocate limited or scarce resources so that a single criterion or goal (often profits) is optimized. “ It aims to maximize profits or minimize costs by combining two variables which involve best use of resources.

(d)    Simulation:

This technique is used to create artificial models of real life situations to study the impact of different variables on that situation. A model is prepared on the basis of empirical data and put to all kinds of influences, positive and negative which may affect the project, and final results are the predictions of actual results if the project in question is put to use. For example, if a transportation company wants to make a road or rail system, it will prepare a simulation model to analyze the effect of all the factors (e, g, m traffic signals, fly over’s, other heavy and light traffic commuting on the road) and if this model appears to be feasible, actual construction of the rail/ road system shall commence.

(e)    Probability theory:

Probability is the number of times and outcome shall appear when and experiment is repeated. What is the probability that sales will increase if expenditure on advertisement is increased is answered through probability theory. These decisions are bases on past experience and some amount of quantifiable data.


It is diagrammatic representation of future events that will occur when decisions are made under different option plans. It reflects outcomes and risks associated with each outcome. Each outcome or future event is evaluated in terms of desired results and the outcome which gives the maximum value is selected out of alternative courses of action. “Decision-trees depict, in the form of a ‘tree’, the decision points, chance events, and probabilities involved in various courses that might be undertaken”.

(g)Queuing theory:

This technique describes the features of queuing situations where service is provided to people or units waiting in a queue. When people or materials wait in queue (because of insufficient facilities), it involves cost in terms of loss of time and unutilized labor. Queuing theory aims at smooth flow of men and material so that waiting time is reduced. This involves additional cost also. Thus, a balance is maintained between the cost of queues and cost incurred to prevent the queues. Queuing models in software packages has made their application feasible. This theory is usually followed in banks and ticket counters it helps in deeming the number of counters so that customers have to wait for minimum time.

(h)Gaming theory:

This theory was developed by Von Neumann and Morgenstern. It helps business organizations face their competitors. If company x changes its plans; say reduces its price to increase its sales, it is likely that the competitors will do the same. How well is company x prepared to face this challenge and still continue with its changed plans is provided in the games theory.It is a technique where two decision-makers maximize their welfare in the competitive environment. The decision maker puts himself in his competitors. Shoes. If he were to compete against his own firm, what would he do. Based on theist thinking, he plans a counter stratify.

(i)Network theory:

The network techniques plan and control the time taken to accomplish a project. They involve breaking up the project into smaller activities and finding the time taken to accomplish each activity. If actual time to complete the project is more than the time determined, it calls for corrective action. PERT (project     Evaluation Review Technique) and CPM (Critical Path Method) are the important network techniques which help in planning and controlling the projects, in terms of time and cost.

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