ACTG2020_Week5 2014 Ch12CMD (1)

The profit benefit forgone becomes an opportunity

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Unformatted text preview: rtunity cost to the firm, and such costs are relevant in the decisionmaking process. ACTG 2020 11 Relevant Cost Analysis: A Two-Step Process Step 1 Eliminate costs and benefits that do not differ between alternatives. Step 2 Use the remaining costs and benefits that differ between alternatives in making the decision. The costs that remain are the differential, or avoidable, costs. LO 1 Different Costs for Different Purposes Costs that are relevant in one decision situation may not be relevant in another context. Class 5 ACTG 2020 13 Identifying Relevant Costs Cynthia, an Ottawa student, is considering visiting her friend in Cynthia, Waterloo. She can drive or take the train. By car, it is 230 kilometers to her friend’s apartment. She is trying to decide which alternative is less expensive and has gathered the following information: expensive Automobile Costs (based on 10,000 miles driven per year) 1 2 3 4 5 6 Annual straight-line depreciation on car Cost of gasoline Annual cost of auto insurance and license Maintenance and repairs Parking fees at school Total average cost $45 per month × 8 months month × 8 months Annual Cost of Fixed Items $ 2,800 1,380 360 Cost per Mile $ 0.280 0.050 0.138 0.065 0.036 $ 0.569 $1.60 per gallo...
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