Updated%20-%20Relevant_cost_analysis

Updated%20-%20Relevant_cost_analysis - Relevant Cost...

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1 Relevant Cost Analysis
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2 Understand These Terms Relevant costs Incremental costs Sunk costs Avoidable costs Opportunity costs
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3 Evaluation of Alternatives Most managerial decisions require a choice between different alternatives Costs and benefits of different alternatives are compared to select the best alternative
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4 Relevant Costs (and Revenues ) All costs (and revenues) that differ across alternatives are relevant in deciding which alternative is the best All costs (and revenues) that remain the same across alternatives are not relevant
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5 Incremental Costs Incremental costs (or revenues) are the amount by which costs (or revenues) change if a particular alternative is selected instead of the base case alternative Incremental costs ( or revenues ) are relevant
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6 Sunk Costs Sunk costs are those costs incurred or committed in the past and therefore they cannot be changed by any current action Since these costs do not differ across the alternatives that managers can choose, they are irrelevant in decision making
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7 Technology Purchased Last Year Invested $500,000 to purchase a new machine Found out a year later that old technology of this machine is obsolete Machine with new technology to replace the old machine costs $900,000 It will increase profit (after write-off of old machine) by $300,000 annually for 5 years relative to the profit expected using the old machine The new technology is expected to become obsolete only after 5 years
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8 Pop Quiz
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9 Is the $500,000 paid for the machine last year relevant for the decision to replace it with the new machine? A)Yes B)No
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10 Pop Quiz
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11 Ardmore Grocery Store has 12,000 cans of salmon just a week past the expiration date. Ardmore paid $0.35 per can . The cans could be sold as is for $0.25 each , or relabeled and sold as gourmet cat food . The cost of relabeling the cans would be $0.05 per can and the cans would then sell for $0.32 per can . What should be done with the cans?
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