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L12 - Lecture - IVLE

# L12 - Lecture - IVLE - Decision Making Learning Outcome 1...

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Decision Making

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Learning Outcome 1. Describe the steps in decision making process 2. Identify different types of relevant and irrelevant costs & benefits 3. Analyze special business decisions with relevant costs & benefits 4. Explain various approaches in pricing decisions
Pre-lecture Readings Chapters 14 & 15 of Hilton & Platt

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7. Evaluate The Decision-Making Process 1-4 1. Clarify the Decision Problem 2. Specify the Criterion 3. Identify the Alternatives 4. Develop a Decision Model 5. Collect the Data and Analyze 6. Make a Decision
The Decision-Making Process 1-5 Data Accuracy Timeliness

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Relevant Information 1-6 1. bearing on the future 2. differs among competing alternatives F_______ I____________ o________ _______________: Incurred in the past; Irrelevant Makes no difference to future costs __________________: Difference under two decision alternatives;
Relevant Information 1-7 Opportunity Costs Potential benefit forgone due to a choice Avoidable Costs Cost that can be eliminated, in whole or in part, by choosing one alternative over the other

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Relevant Cost Analysis: A Two-Step Process Identify and eliminate costs and benefits that do not differ between alternatives Apply the differential costs and benefits into the decision making model and evaluate the outcome of the calculations Step 1 Step 2 Relevance of the Costs ___________ according to ____________ and so analyze the situation!
Identifying Relevant Costs Annual Cost of Fixed Items Cost per Mile 1 Annual straight-line depreciation on car 2,800 \$ 0.280 \$ 2 Cost of gasoline 0.100 3 Annual cost of auto insurance and license 1,380 0.138 4 Maintenance and repairs 0.065 5 Parking fees at school 360 0.036 6 Total average cost 0.619 \$ Automobile Costs (based on 10,000 miles driven per year) Cynthia, a Malaysian student studying in Penang, is considering visiting her friend in Kuala Lumpur. She can drive her existing car or take the budget airline. By car, it is 230 miles to her friend’s apartment. She is trying to decide which alternative is less expensive and has gathered the following information: \$45 per month × 8 months \$2.70 per gallon ÷ 27 MPG \$24,000 cost \$10,000 salvage value ÷ 5 years

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Identifying Relevant Costs 7 Reduction in resale value of car per mile of wear 0.026 \$ 8 Round-tip airfare 104 \$ 9 Benefits of relaxing on plane trip ???? 10 Cost of putting dog in kennel while gone 40 \$ 11 Benefit of having car in Kuala Lumpur ???? 12 Hassle of parking car in Kuala Lumpur ???? 13 Per day cost of parking car in Kuala Lumpur 25 \$ Some Additional Information Annual Cost of Fixed Items Cost per Mile 1 Annual straight-line depreciation on car 2,800 \$ 0.280 \$ 2 Cost of gasoline 0.100 3 Annual cost of auto insurance and license 1,380 0.138 4 Maintenance and repairs 0.065 5 Parking fees at school 360 0.036 6 Total average cost 0.619 \$ Automobile Costs (based on 10,000 miles driven per year)
Identifying Relevant Costs Gasoline (460 @ \$0.100 per mile) 46.00 \$ Maintenance (460 @ \$0.065 per mile) 29.90 Reduction in resale (460 @ \$0.026 per mile) 11.96 Parking in Kuala Lumpur (2 days @ \$25 per day) 50.00 Total 137.86 \$ Relevant Financial Cost of Driving Round-trip ticket 104.00 \$ Relevant Financial Cost of Taking the Plane

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Total and Differential Cost Approaches
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