decision Making

Assumptions

No matter what kind of decision is being made, the manager will always base his or her

decision on certain assumptions. For example, the manager’s decisions to have his or

her department work overtime on a holiday weekend, will likely rest on the following

certain assumptions:

The output achieved during the overtime is needed and must occur during that

period, which means that it could not be produced at another time without

hurting customer service.

The added overtime premiums incurred will not turn the eventual sale of the

products into unprofitable transactions.

He or she has the option to require mandatory overtime and that he or she will

not have to ask versus require the extra work hours.

If any of these assumptions prove to be untrue, his or her decision to schedule the

overtime may prove to be a bad one.

For the first assumption, if the output to be produced during the overtime will not be

sold for days or weeks after the holiday, then working overtime now may be an

unnecessary added cost and could negatively impact employee relations or morale.

For the second assumption, if the normal labor cost of the product is $5.00 per unit and

the normal profit is $1.00 per unit, will the product still be profitable? If the overtime

labor cost is $7.50, then working overtime to produce these items will result in a loss of

$1.50 per unit.

$2.50 additional labor cost - $1.00 normal profit = $1.50 per unit loss

If the supervisor requires overtime work on a holiday weekend, he or she will most

likely incur some level of negative employee reaction because many employees would

prefer to be with their families during the holiday weekend. If overtime is made

mandatory when the company policy says that it should be voluntary, he or she will

surely cause some negative impact on employee relations or morale.

Whenever managers make important decisions, they should formally or informally

make a list of their key assumptions. In annual strategic or business planning, key

assumptions are a formal requirement of good plans. For example, in a strategic plan,

typical assumptions include the following:

assumptions about current or future likely legislation that could affect the

industry

assumptions about the likely entrance and/or exit of new competitors

assumptions about market trends for the company's products, frequently

dictated by technology development

assumptions about the long-term market growth for a product

If any one of these major assumptions proves to be invalid, the entire strategic plan of

the firm could be at risk.