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Business English
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Chapter 8 / Exercise 117
Business English
Guffey/Seefer
Expert Verified
Differential Analysis- Examples and Activities (with a few notes thrown in)Learning Objective #1: Describe the 5 steps in the Decision Making Process1.Identify the decision problem.2.Determine the decision alternatives.3.Evaluate the cost and benefits of the alternatives.4.Make the decision.5.Review the results of the decision making process.Learning Objective #2: Identify relevant and irrelevant costs and benefits in a decision.What makes something relevant in decision making?1.Differ among alternatives2.Difference occurs in the futureWhat is a sunk cost? Is it relevant?oHistorical costoAny decision you make going forward will not change sunk costTwo Criteria relevant costs:oDiffer among alternativesoDifferences occurs in the futureWhat are some other terms that are synonymous with relevant cost?oAvoidable costs:A cost can be eliminated by choosing one alternative over another in a decisionoIncremental costs:An increase in costs between two alternatives.oA difference in cost between two alternatives.
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Business English
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Chapter 8 / Exercise 117
Business English
Guffey/Seefer
Expert Verified
Example 1 Sunglass House made 300 defective units (sunglasses) last month. Fortunately, the sunglasses were identified as being defective before they were sold to customers. They are currently included in Sunglass’ending inventory at $50 each. At the end of this year, the company will have to write off their $15,000 cost, since the units have no value in their present condition. The production manager has determined the sunglasses could be reworked for $5 and sold for $40 each. Sunglass has also received a bid from a liquidation company to purchase the defective units for $30 each.A.What alternatives are available to Sunglass House?
B.What information is irrelevant to the decision?
C.Which alternative would generate the best financial result?
Learning Objective #3: Prepare an analysis showing whether a product line or other business segment should be added or dropped. Explain qualitative considerations of this decision.What is the main reason a company may consider eliminating a product line?
What is segment margin and why is it important in this particular decision?

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