Budgets for integrating decentralized investment and production planning

Planning for an economic enterprise can be dichotomized into short-run production planning and longer-run investment planning. Usually these problems are treated as if they were separate, if not independent. This paper briefly reviews the separate approaches to optimal production decision making and investment planning, ‘fusing’ these models in order to consider the two issues simultaneously. The resulting ‘fused’ model is used to illustrate several difficulties which result from an intuitive synthesis of the independent solutions of the production problem and the investment problem. An integrated model is presented representing a centralized simultaneous solution for decision variables from the two functional fields. The paper compares and contrasts the synthesis of separate functional models to the decomposition of a simultaneous model of those functional areas. A result of this comparison is a theoretical justification for operating budgets and revenue targets as organizational mechanisms for achieving coordinated plans among decentralized planning units. Further, the set of conditions are identified under which the two approaches to simultaneous decision making are equivalent.