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Chapter 7

The Use of Cost Information in Management Decision Making

Learning Objectives

  1. Explain the role of incremental analysis (analysis of incremental costs and revenues) in management decisions.
  2. Define sunk cost, avoidable cost, and opportunity cost and understand how to use these concepts in analyzing decisions.
  3. Analyze decisions involving joint costs.
  4. Discuss the importance of qualitative considerations in management decisions.

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Jon Jensen is the owner/operator of Jensen's Rapid Copy, a large copy center located near Eastern State University.

Currently, the center is open from 6 A.M. until 8 P.M. seven days per week. However, Jon is considering two alternatives: (1) staying open until midnight or (2) staying open 24 hours a day.

To properly make this decision, Jon should perform incremental analysis. We touched on this topic in Chapter 1 and in subsequent chapters. Now we discuss it in more detail.

Decision Making/Incremental Analysis

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INCREMENTAL ANALYSIS

All decisions involve a choice among alternative courses of action. In Chapter 1, we learned that the solution to all business problems involves incremental analysis—the analysis of the incremental revenue and the ...

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