Chapter 12: Making a Lot of Decisions

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It is both useful and convenient to think about business decisions based on four key variables: cost, expense, price, and value.

Note that these concepts are interrelated; for example, costs represent assets, while expenses relate to assets consumed during a period. Cost forms the basis for pricing decisions and value is foundational to effective pricing (i.e., the price of something cannot exceed its value). Financial models used to make business decisions will include some, or all, of these variables.

As a final exercise, the following case facts both combine and integrate the financial modeling decisions that were covered in previous chapters. This is done through a comprehensive business situation, which takes an enterprise from its initial inception to mature operations. The exercise involves making decisions about production (costs), spending (expenses), revenues (prices), and sales (value). (Excel file: Omega Corp(shell).xls.)