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Chapter 8 Reading Managerial.docx - Chapter 8 Relevant...

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Chapter 8 Relevant Costs for Short Term Decisions Directed Reading Part I- Introduction 1. What are some of the potential benefits of outsourcing? - You can focus on your brand. - Example by Nike outsourcing they can focus on designing, developing, marketing and selling athletic footwear, apparel, and equipment. 2. What are some of the potential drawbacks of outsourcing, especially overseas? - You must rely on others to follow your standards for quality and fulfill production orders on a timely basis. - It also opens the company to any exchange rate fluctuations, trade tariffs, port strikes, and other global risks. 3. Why won’t we need to consider the time value of money in the decisions discussed in this chapter? - The decisions in this chapter pertain to short periods of time, this we don’t have to worry about TVM. Part II- How do managers make decisions? (LO 1) 4. What are the steps to the decision making process? 1) Define Business Goals 2) Identify Alternative Course of Action 3) Gather & Analyze Relevant Information: Compare Alternatives 4) Choose the Best Alternative 5) Implement Decision 6) Follow-Up: Compare Actual Results with the Results Anticipated 5. What two characteristics of information make it relevant to a decision? - It pertains to the Future - It differs among alternatives 6. Is all relevant information financial in nature? Explain. - No, some of the information may be nonfinancial. Example: If you are looking at universities, some factors may be the size of the school, location, etc. 7. Review the critical thinking steps first listed on page 18 of the book. Briefly describe aspects of the critical thinking model that are especially pertinent to making good business decisions. 8. What are the two keys to making decisions? - Focus on relevant revenues, costs, and profits. - Use a contribution margin approach that separates variable costs from fixed costs. 1
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9. What do most decisions boil down to? - Most decisions boil down to a cost benefit analysis. 10. Will the same pieces of information be relevant to every decision? Explain. - Every decision is unique, thus not every piece of information is relevant in every single case. - The decisions need to be accessed individually to determine relevant pieces of information 11. Briefly describe two decision pitfalls to avoid: i. Avoid including sunk costs in your analysis. (Sunk Cost are costs that have been incurred in the past and cannot be changed regardless of which future action is taken.) ii. Avoid using unit costs unless they are purely variable in nature. 12. Which costing approach is generally better for decision making: absorption or variable costing? If you use unit costs in your decision analysis, what should you do first? - Variable costing is better for decision-making purposes because it does not blend together the variable and fixed production costs.
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