KCQ – Chapter 8

We have got to make some decisions

The title for this chapter certainly intrigued me as I was not sure what to expect or what I was even in for, but I had a feeling it was going to be a chapter that really made me think… and I was right. Not knowing what to expect I already had a million questions running through my mind like what decisions are we making, why are we making them, why do I have to make them? But seeing that it was not a lengthy chapter, I was eager to get my head into the chapter and hopefully answer the questions I had.

I started reading “focusing on contribution” … my first thought was ok; I will be making decisions on where money is being contributed after a profit or something and then I saw the equation. I don’t particularly like equations because they are sometimes confusing but anyway, the equation reads “CM = S – VC” and although I am never overly thrilled to see equations, I was reassured by the text that explains the equation thoroughly by breaking it all down individually. Lucky for me, I already came across contribution margin (CM), Sales revenue (S) and Variable Cost (VC) in chapter 6 so I had a good sense of familiarity and it gave me a bit more confidence in the fact that I could understand what is going on. So, thanks to that piece of text in this chapter about contribution I now know how to calculate the contribution margin by finding out the difference between S and VC.

The next section about “Long term decisions” was really easy to comprehend and I didn’t have any questions or concerns in regard to this bit because it was all quite straight forward, it’s just about businesses making decisions that are in the best interest of the company and a decision that will be beneficial for the company in the long term.

In the next section I saw another equation and was a little bit startled as it looks like a big one. It was for account rate of return. This formula reads ARR(%) = Average net profit / Initial investment x 100. I was nervous at first just from looking at it because it looked like a formula I would need to get my head around as it was quite confronting in the beginning with the times, divides, percentages and all the rest but I was please to find how easy it was to understand. Essentially, this equation is just the average net profit divided by the initial investment which is then timed by 100.

I was at the end of the chapter before I even knew it. The chapter ended up being not at all what I was expecting but it was definitely useful and I know I will need it for my assignment so I have taken some careful notes on long term decisions and focusing on contribution and the account rate of return formula. Overall, this chapter was a good chapter to read, it was not too long and boring, it was concise and straight to the point and I came to the conclusion with not too many questions. I found a lot of the information in it valuable to the assignment that I am doing.