•Define relevant and irrelevant costs
•Define sunk costs and opportunity costs
be able to calculate all five types of business decisions:
1)Dropping products, departments, and territories: important to see which fixed costs can be avoided. Compare contribution margin lost with avoidable cost saving. May also include alternative use of freed capacity (opportunity costs)
2)Make or buy: important to see which fixed costs can be avoided. Compare incremental costs of making with the incremental costs of buying from outside. May also include alternative use of freed facilities (opportunity costs)
3)Special sales orders: compare incremental revenue from the special order with the incremental cost from the special order. Important to see whether there's idle capacity (the existing fixed manufacturing overhead costs would not be affected by the order). Calculate the minimum price to accept the special order.
4)Utilize constrained resources: when you have a constraint (machine hours, labor hours etc.) emphasize the products with the highest contribution margin per unit of constraint
5)Selling as is or processing further: cost of bringing the product to the as-is state is not relevant. It is only relevant to compare the cost of processing to the increase in revenue from processing.