RSM222H1 Chapter Notes - Chapter 12: Sunk Costs, Opportunity Cost, Decision-Making
Document Summary
Introduction: decision making = complex, imp process, key to making good decisions = identify and compare only the relevant costs and benefits of each alternative. Irrelevant cost considerations waste time/can lead to wrong decision: cost terms = differential, incremental, opportunity and sunk costs. The costs that remain are the differential, or avoidable, costs. Different costs for different purposes: managers need different costs for different purposes, relevancy of cost depends on purpose. Reconciling the total and differential approaches: even if you include irrelevant costs they cancel out when comparing alternatives, + differential cost and benefit column = difference between alternatives favours the new machine. Dangers always exist in an irrelevant piece of data used improperly resulting in incorrect decision: best to discard irrelevant. Identify costs that can and (cid:272)a(cid:374)"t be avoided (relevant and not relevant): therefore, line should not be discontinued unless a more profitable use can be found to the floor and counter space that it is occupying.
