Week 9 - CH07 rev.pptx - CHAPTER 7 The Use of Cost Information in Management Decision Making Learning Learning Objectives Objectives 1 Explain the role

Week 9 - CH07 rev.pptx - CHAPTER 7 The Use of Cost...

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CHAPTER 7 CHAPTER 7 The Use of Cost Information in Management Decision Making The Use of Cost Information in Management Decision Making
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Learning Objectives Learning Objectives 1. Explain the role of incremental analysis in management decisions ; and discuss sunk costs , avoidable costs , and opportunity costs when analyzing decisions. 2. Discuss decisions involving joint products and costs , as well as the importance of qualitative considerations in management decisions.
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Incremental Analysis Incremental Analysis Incremental analysis: analysis of the incremental revenue and incremental costs when one alternative is chosen over another . Pretty much all decisions today involve a choice among alternative courses of action… Let’s see an example... Learning objective 1: Explain the role of incremental analysis in management decisions; and discuss sunk costs, avoidable costs, and opportunity costs when analyzing decisions.
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Incremental Analysis Incremental Analysis Ex. Currently, Mark’s Food Restaurant is open from 6am – 8pm, 7 days per week (Alternative 1) . However, Mark is considering two other alternatives: Staying open until midnight (Alternative 2) or Staying open 24 hours a day (Alternative 3) . Mark should perform incremental analysis. The solution to most business problems involves incremental analysis. Let’s see some definitions…
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Concept Definition Incrementa l Revenue Additional revenue received by selecting one alternative over another. Incrementa l Cost Additional cost incurred by selecting one alternative over another. Referred to as relevant costs or differential costs because they differ between decision alternatives. Incrementa l Profit Difference between incremental revenue and incremental cost . The alternative that yields the highest incremental profit should be selected.
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Incremental Analysis Example Incremental Analysis Example Going back to our example: Let’s start by considering Mark’s Alternative 1 vs. Alternative 2: Alternative 1 is the status quo (open from 6am – 8pm). Alternative 2 involves the company extending the hours from 8pm to midnight. Let’s see the incremental costs and revenues associated with choosing Alternative 1 over 2…
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Incremental Analysis Example Incremental Analysis Example
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Incremental Analysis Incremental Analysis Incremental analysis can be extended beyond two decision alternatives . Recall that Mark is also considering the option of staying open 24 hours a day (Alternative 3) . The three alternatives now are: closing at 8pm, closing at midnight, or staying open 24 hours a day.
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Incremental Analysis Incremental Analysis There are several ways we can deal with a third choice. We can compare staying open 24 hours a day ( Alternative 3 ) to the midnight option ( Alternative 2 , which dominates the status quo) or Determine the best alternative by calculating the profit under each of the three alternatives.
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  • Fall '11
  • NANCYSHOEMAKE

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