BUSINESS DECISION AND ECONOMICS OF ONE UNIT

What is operational business decision?

A large part of conducting any business is making decisions. Some of these are strategic: should we enter a certain market, how should we design our new product, which
partners and distribution channels should we choose? Others are more routine, made manually or automatically during everyday business operations. The latter are
operational decision. Operational decisions are determination that businesses make on a regular basis, a selection or calculation of an outcome that depends on a
number of prevailing circumstances (inputs) and which ultimately, has an observable impact on the behavior of an organization. They include making determinations like:

 Should we extend a line of credit to this customer? On what terms?

 Should we initiate an inquiry in to a customer’s insurance claim or just pay it?
 What products should we recommend to client when they visit our website, given their past behavior?
 Does this trade fee structure satisfy compliance regulations?

Why are decisions important?

Operational decisions determine the day to day profitability of the business, how effectively it retains customers or how well it manages risk. Often the
quality and consistency of decision making determines your client reputation for some clients their sole perception of your company is obtained from the
outcome of these decision. The logic of some decision making is intellectual capital: it helps to establish or maintain a competitive advantage for your
company it represent what you do to better you rivals, your unique selling points. You need to identify the important decisions you are making, define the
decision making process transparently, ensure they are made accurately, monitor their performance and manage their evolution and improvement.

ECONOMICS OF ONE UNIT- Method used to determine whether a business model can be successful (profitable), by calculating if an individual unit of good or
service would be profitable.

FIXED COST- is a recurring expense that isn’t affected by the number of items a business produces.

VARIABLE EXPENSE- is an expense that changes based on the amount product or service a business sells.

Two types of variable expense:

 Cost of goods sold (COGS)- for manufacturing and merchandising (retailing and wholesaling) businesses, the variable expense that is associated
with each unit of sale is called COGS.
 Other variable expense- these can include such expenses as commissions for salesperson, shipping and handling charges, or packaging.

VARIABLE COST- which are costs that vary with production. As you produce and sell something, you incur more of these costs.

First thing you have to figure out is selling price per unit. This is important because you have to know how much left over after you subtract all the costs of
the item. Next you will be determining the figure in the three categories of variable costs;

 Direct materials- all of the items/ingredients that go into creation/ producing/ making the item or service.
 Direct labor- manpower needed to produce the good or offer the service, per unit.
 Direct labor- manpower needed to produce the good or offer the service, per unit.

Once you figure out all of those things, you can figure out what your gross profit margin per unit is, and what your contribution margin per unit is.
Contribution margin represents the final product of the economics of one unit. This is the amount of money that contributes towards covering a firm’s fixed
cost. ( I SAID U + OTHER FXs)