DECISION MAKING AND RELEVANT INFORMATION
Homework Assignment: 11-2, 11-3, 11-4, 11-6, 11-7, 11-10, 11-11, 11-12, 11-16
, 11-21, 11-22,
numbers represent minimum requirement
Relevant costs are expected future costs that differ among the alternative courses of
action being considered. Historical costs are irrelevant because they are past costs and, therefore,
cannot differ among alternative future courses of action.
No. Relevant costs are defined as those expected future costs that differ among
alternative courses of action being considered. Thus, future costs that do not differ among the
alternatives are irrelevant to deciding which alternative to choose.
Quantitative factors are outcomes that are measured in numerical terms. Some
quantitative factors are financial––that is, they can be easily expressed in monetary terms. Direct
materials is an example of a quantitative financial factor. Qualitative factors are outcomes that
are difficult to measure accurately in numerical terms. An example is employee morale.
No. Some variable costs may not differ among the alternatives under consideration and,
hence, will be irrelevant. Some fixed costs may differ among the alternatives and, hence, will be
No. Some of the total unit costs to manufacture a product may be fixed costs, and, hence,
will not differ between the make and buy alternatives. These fixed costs are irrelevant to the
make-or-buy decision. The key comparison is between purchase costs and the costs that will be
saved if the company purchases the component parts from outside plus the additional benefits of
using the resources freed up in the next best alternative use (opportunity cost). Furthermore,
managers should consider nonfinancial factors such as quality and timely delivery when making
No. Managers should aim to get the highest contribution margin per unit of the
constraining (that is, scarce, limiting, or critical) factor. The constraining factor is what restricts
or limits the production or sale of a given product (for example, availability of machine-hours).
No. For example, if the revenues that will be lost exceed the costs that will be saved, the
branch or business segment should not be shut down. Shutting down will only increase the loss.
Allocated costs are always irrelevant to the shut-down decision.
Cost written off as depreciation is irrelevant when it pertains to a past cost such as
equipment already purchased. But the purchase cost of new equipment to be acquired in the
future that will then be written off as depreciation is often relevant.