GOALS AND OBJECTIVES

To understand the nature and importance of differential costs and revenues and how they

affect tactical decisions

✓ To understand the relevance of opportunity costs in any decision

To understand how to properly frame and utilize a cost/benefit analysis

✓ To understand what the "real cost" is of doing ANYTHING

To introduce special orders and "sell or process" decisions, and how to apply differential

costing and cost/benefit analysis to them

1. In order for a cost (or anything for that matter) to be considered relevant for a decision, what 2

characteristics are needed?

2. What are differential costs and revenues? WHY are they important?

3. What is a sunk cost? WHY are sunk costs always irrelevant in decision making?

4. What is an opportunity cost? WHY are they always relevant when making a decision?

5. What is meant by an "avoidable cost"?

6. What are the basic steps involved in decision making?

7. What is a "quantitative" factor in a decision?

8. What is a "qualitative" factor in a decision?

9. What do we mean by "Cost-Benefit Analysis?

10. You operate a lemonade stand located outside of an office building. Your costs are as follows:

Rent paid to building owner

$25 per week

Lemons

$25 per bag of 100 lemons.

Sugar

Cups

$5 per box of 100 sugar packets

$50 per bag of 100 cups

Each cup of lemonade uses one lemon and one sugar packet. Your normal selling prince is

$1.50 per cup.

a) It is one minute before closing time and there is nobody else in sight. You are about to

pack up when Frank stops by and says that all 25 people in his office would like a cup of

lemonade and offers you $22 for the whole bunch. This is a ONE TIME offer. You have

never seen Frank before and you never will again. Do you accept this offer or not, and

WHY?

b) What if there was a long line of customers waiting at the lemonade stand - enough

customers to use all the lemons that you have. Does this make any difference? NOW

would you sell to Frank at $22? WHY or WHY NOT?/n11. Roolex is a manufacturer of imitation Rolex "knock-offs". They have 500 watches on hand that

already cost $15 each to make. They are, however, out of style and cannot be sold as is -

even the people buying watches off the street won't buy them!

All is not lost, however, because they can be "refitted" at an additional cost of $4 per watch,

and then sold for $18 each. Alternatively, Sam Sham the Discount Man will buy them for $3

each and use the watch bands, throwing everything else away.

What should they do, and why?