After studying this chapter you will be able to understand: Explain what makes information relevant to a particular business decision; discuss the relevance of opportunity costs, sunk costs, and out-of-pocket costs in making business decisions; use incremental analysis in common business decisions;. | Incremental Analysis Chapter 20 2 Special order decisions Product mix decisions Make or buy decisions Joint product decisions Product markets can change quickly due to competitor price cuts, changing customer preferences, and introduction of new products by competitors. Managers must make short-run decisions, with a fixed set of resources, to react to the changing market place. The Challenge of Changing Markets Will you drive or fly to Florida for spring break? You have gathered the following information to help you with the decision. Motel cost is $80 per night. Meal cost is $20 per day. Your car insurance is $100 per month. Kennel cost for your dog is $5 per day. Round-trip cost of gasoline for your car is $200. Round-trip airfare and rental car for a week is $500. Driving requires two days, with an overnight stay, cutting your time in Florida by two days. The Concept of Relevant Cost Information 8 days @ $80 8 days @ $20 8 days @ $5 The Concept of Relevant Cost Information Costs do not differ, so they are not relevant to decision. Also, car insurance is not relevant to the decision as it is a past cost. The Concept of Relevant Cost Information Transportation costs differ between the two alternatives, so they are relevant to your decision Are the extra two days in Florida worth the $300 extra cost to fly? The Concept of Relevant Cost Information Decision making involves five steps: Define the problem. Identify the alternatives. Collect information on alternatives. Eliminate irrelevant information. Make a decision with the remaining relevant information. Decision Making Information that varies among the possible courses of action being considered. — Incremental costs and revenues — Important cost concepts for business decisions. Opportunity costs. Sunk costs. Out-of-pocket costs. 1 2 Relevant Information in Business Decisions The benefit that could have been attained by pursuing an alternative course of action. Example: If you were not attending college, you . | Incremental Analysis Chapter 20 2 Special order decisions Product mix decisions Make or buy decisions Joint product decisions Product markets can change quickly due to competitor price cuts, changing customer preferences, and introduction of new products by competitors. Managers must make short-run decisions, with a fixed set of resources, to react to the changing market place. The Challenge of Changing Markets Will you drive or fly to Florida for spring break? You have gathered the following information to help you with the decision. Motel cost is $80 per night. Meal cost is $20 per day. Your car insurance is $100 per month. Kennel cost for your dog is $5 per day. Round-trip cost of gasoline for your car is $200. Round-trip airfare and rental car for a week is $500. Driving requires two days, with an overnight stay, cutting your time in Florida by two days. The Concept of Relevant Cost Information 8 days @ $80 8 days @ $20 8 days @ $5 The Concept of Relevant Cost Information Costs do
