Capital budgeting and other types of relevant cost decisions attempt to quantify all of the inflows and outflows associated with choosing a particular course of action. However, sometimes firms fail to recognize some of the more obscure factors associated with these decisions. These factors are sometimes referred to as qualitative factors due to the fact they are usually more difficult and sometimes impossible to quantify. The inability to quantify these factors does not reduce their importance and frequently turn a seemingly good decision into a poor decision. For example, if a firm outsources a large portion of their work to a foreign country, they may face a backlash (i.e., lost sales) from consumers in this country.
Shown below is a list of some examples of qualitative factors and examples of the type of questions decision makers would ask. Create your own list of questions instead of using the examples below:
Compatibility (e.g., Will adopting the new computer software require a significant upgrade in all of our computer hardware?)
Serviceability (e.g., Can our maintenance team make needed repairs or will we have to call in a specialist even for minor issues?)
Flexibility (e.g., Which machine can be easily configured for other uses if needed?)
Reliability (e.g., Which model provides the lowest possibility of a major breakdown?)
Obsolescence potential (e.g., What is the likelihood that replacement parts will not be available over the entire useful life of the machine?)
Comfort (e.g., Which model has the best ergonomic design for the comfort and long-term health of our employees?)
Safety (e.g., Which machine has the best accident-free record?)
Environmental impact (e.g., Which option emits the lowest levels of toxic emissions?)
Community impact (e.g., Which production plan is the best utilization of the local work force?)
Action Items
Read and reflect upon the following scenario:
Food-To-You, Inc. operates a fleet of trucks that travels to various construction sites to sell snacks and beverages. The company is considering the following changes in order to improve profitability.
Replace all trucks with new trucks that run on E85 (i.e., a new low cost fuel that is 85% ethanol and 15% gasoline).
Drop slow moving inventory items in order to carry more faster moving items. This will allow each truck to visit more construction sites and not have to restock as often during a shift.
Increase the amount of health care insurance premium that drivers are required to contribute to their health care insurance coverage.
Eliminate the in-house maintenance operation and outsource all maintenance to a local repair shop.
Cancel the lease on the warehouse building used to park the trucks at night. Drivers will simply park their assigned truck at their residences.
Develop a list of 10 questions that address the qualitative factors that the decision makers at Food-To-You, Inc. should be asking related to the proposed changes.