After you have mastered the material in this chapter, you will be able to: Identify the characteristics of relevant information, make appropriate special order decisions, make appropriate outsourcing decisions, make appropriate segment elimination decisions, make appropriate asset replacement decisions. | Chapter Thirteen Relevant Information for Special Decisions © 2015 McGraw-Hill Education. 1 Relevant Information Two primary characteristics distinguish relevant from useless information: Relevant information differs among the alternatives under consideration. Relevant information is future oriented. 13-2 2 Sunk Cost A sunk cost has been incurred in a past transaction and cannot be changed. It is not relevant for making current decisions. I wish I hadn’t bought that stock. Cost me $25,000, and now it’s worth only $15,000. I really need a car but don’t have the cash! Just sell the stock and buy the car! You’ve already taken the loss. The $25,000 is a sunk cost. Like I said, sell the stock and buy the car you need. I don’t want to take the loss! 13-3 3 Opportunity Costs An opportunity cost is the sacrifice that is incurred in order to obtain an alternative opportunity. I think I am beginning to see what you mean. The opportunity cost of owning the stock is $15,000. That is the amount . | Chapter Thirteen Relevant Information for Special Decisions © 2015 McGraw-Hill Education. 1 Relevant Information Two primary characteristics distinguish relevant from useless information: Relevant information differs among the alternatives under consideration. Relevant information is future oriented. 13-2 2 Sunk Cost A sunk cost has been incurred in a past transaction and cannot be changed. It is not relevant for making current decisions. I wish I hadn’t bought that stock. Cost me $25,000, and now it’s worth only $15,000. I really need a car but don’t have the cash! Just sell the stock and buy the car! You’ve already taken the loss. The $25,000 is a sunk cost. Like I said, sell the stock and buy the car you need. I don’t want to take the loss! 13-3 3 Opportunity Costs An opportunity cost is the sacrifice that is incurred in order to obtain an alternative opportunity. I think I am beginning to see what you mean. The opportunity cost of owning the stock is $15,000. That is the amount you could receive if you decide to sell. 13-4 4 Relevance is an Independent Concept Management at Better Bakery Products is debating whether to add a new product, either cakes or pies, to the company’s product line. Projected costs are shown: Under either alternative, a new production supervisor must be hired at a cost of $25,000 per year. Cakes are distributed under a nationally advertised label. Pies are marketed under the company’s own name and will require new advertising. 13-5 5 Relevance is an Independent Concept Which costs are relevant? Material costs are relevant because they differ. Fifty cents can be avoided by choosing cakes instead of pies. Labor costs and the supervisor’s salary are not relevant because they do not differ. The advertising costs can be avoided if the company elects to make cakes. The franchise fee can be avoided if the company elects to make pies. Whether a cost is fixed or variable has no bearing on its relevance. 13-6 6 Relevance is Context-Sensitive A
