Qualitative Considerations and Linear Profit Models Quality is much better than
ID: 2582192 • Letter: Q
Question
Qualitative Considerations and Linear Profit Models
Quality is much better than quantity. One home run is much better than two doubles.
—Steve Jobs, American entrepreneur and cofounder of Apple Inc. (Burrows & Grover, 2006)
Quantitative data goes only so far in a business: the human element of business and accounting is invaluable. It is difficult for computers and algorithms to determine quality of content. Qualitative considerations matter when making any decision in life, and financial decisions related to linear profit modeling are no exception. For this Discussion, you analyze the qualitative considerations of linear profit modeling. You analyze some of the tools that managers use when they make decisions, develop external reports, and control organizational activities. Specifically, you focus on linear profit modeling as a means for calculating break-even point and target profits.
To prepare for this Discussion, review the article “Whopper to Go” from this week’s Learning Resources. Then consider how Burger King’s profitability problems can be framed in a linear profit model. (Note: Numbers are not required to frame this problem mathematically.)
Post by Day 3 your response to the following:
How do linear profit models relate to GAAP-basis income statements?
In terms of qualitative considerations, what are the limitations of using linear profit models as it applies to the Burger King example?
Are these limitations present in all linear profit models? Why or why not?
Why might it be useful to frame Burger King’s profitability problems using a linear profit model despite the limitations of the model?
Be sure to support your work with specific citations from this week’s Learning Resources and any additional sources.
Explanation / Answer
Linear profit model related to GAAP basis income statements:
Both the GAAP and the linear proft model can be used to maximize proft and avoid loss,managers use them in making decisions, developing external reports, and controllingorganizaTonal acTviTes. ±he GAAP income statement is interrelated with the linear proftmodel: ±he principles and guidelines Found in GAAP are used to prepare the linear proft modeland GAAP is useFul in standardizing and regulaTng the linear proft model.
Limitations:
Linearity of relations: A primary requirement of linear programming is that the objective function and every constraint must be linear. However, in real life situations, several business and industrial problems are nonlinear in nature.
Single objective: Linear programming takes into account a single objective only, i.e., profit maximization or cost minimization. However, in today's dynamic business environment, there is no single universal objective for all organizations.
Certainty: Linear Programming assumes that the values of co-efficient of decision variables are known with certainty. Due to this restrictive assumption, linear programming cannot be applied to a wide variety of problems where values of the coefficients are probabilistic.
Constant parameters: Parameters appearing in LP are assumed to be constant, but in practical situations it is not so.