chap11 - David Franz, 2012 CHAPTER 11 Decision Making and...

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© David Franz, 2012 CHAPTER 11 – Decision Making and Relevant Information I. Decision making. A. Decisions involve choosing among alternatives for future action. See Exhibit 11.1, p. 392 B. Decisions should consider both quantitative (numbers) and qualitative aspects. 1. Select the alternative that gives the highest expected income (or smallest expected loss) to the firm. 2. Focus on costs and revenues that will be different because of the decision – Relevant (differential) costs and relevant (differential) revenues (differential costs are also called avoidable costs). Irrelevant costs do not affect decisions. See Exhibit 11-2, p. 393. C. Sunk costs have already been incurred and will be the same no matter which alternative is selected. Sunk costs are NOT relevant to a decision e.g. If you are deciding whether to repair a car or buy a new one, the costs of current and future repairs are relevant but the costs of past repairs are sunk costs and not relevant. Your decision will not change the costs of past repairs although past repairs may be useful to help predict future repairs. D. Opportunity cost is the benefit lost by taking one action as opposed to another. It is associated with the alternative you do NOT select, e.g. if you decide to buy a house rather than rent, opportunity cost is the interest you will NOT earn on the money you used for a down payment but that you could have invested if you had continued renting. E.
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This note was uploaded on 09/29/2011 for the course ACCT 305 taught by Professor Franz during the Spring '07 term at S.F. State.

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chap11 - David Franz, 2012 CHAPTER 11 Decision Making and...

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