(484015937) Decision Making - lecture notes - Relevant Data(Costs and Benefits for Decision-Making Learning Objectives When you have completed this

(484015937) Decision Making - lecture notes - Relevant...

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Relevant Data (Costs and Benefits) for Decision-Making Learning Objectives: When you have completed this chapter, you should be able to: Explain the importance of relevant information in decision making. Identify relevant and non-relevant information in various decision making situations. Evaluate decisions involving relevant and non-relevant information. In particular, you should be able to make decisions in the following situations: 1. Special order (special selling price decision). 2. Make or buy (outsourcing). 3. Replacing an old asset. 4. Keeping or closing a product line or an organizational unit. 5. Optimal product mix. Incorporate uncertainty in the decision making process. Consider the strategic implication in the decision making process. T HE B ASIC C ONCEPTS FOR D ECISION -M AKING Relevant Data in Decision Making Companies usually make decisions with the objective of maximizing the present value of future cash flows. In order to ensure that the right decisions are taken, the manager must incorporate all the relevant (appropriate or related) information to the specific decision at hand in their decision making process and exclude non-relevant information. There are two types of information that can be considered in the decision-making process: quantitative or financial information (i.e., costs and revenues) and qualitative information. Qualitative information includes things like effect of a decision on employee morale, loss of control by giving work to outsourcing providers, and effects on a community or the environment. When faced with making a decision that includes qualitative factors such as these, managers must employ skill, experience, judgment, and ethical standards. In this chapter, we will only deal with the quantitative (i.e., financial) aspects of decisions. The concept of relevant data requires that the ONLY revenues and costs that should be considered in making a particular decision are those that will be affected by the decision. Costs and revenues that are independent of a decision are not relevant and should not be considered when making that decision. The term relevant data can be defined as the e xp ec ted fut u re c ash fl o ws (inflows and outflows) that will dif fe r between the various alternatives being considered, and will be dire c t l y af f e c ted by the decision at hand.
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Sunk Costs: Sunk costs are historical costs that have been incurred in the past and will not change regardless of which decision the company chooses. Hence, sunk costs are irrelevant for decisions and should be ignored in decision making process, because they cannot be changed. Avoidable Costs: An avoidable cost is a cost that can be eliminated (in whole or in part) as a result of choosing one alternative over another. Any cost that is avoidable is relevant.
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