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Analyze Cost and Role in Decision Making

Analyzing Cost and Its Role in Decision Making

The concept of opportunity cost and examination of how to calculate the cost of alternatives over single and multiple time periods. Analyze cost and its role in the decision-making process by answering the following questions:

? Citing examples, differentiate between opportunity cost, marginal cost, and relevant cost.
? Assess the relationship of marginal benefit and marginal costs. How is marginal benefit measured, and how does it relate to marginal costs?
? What other factors must managers address before making decisions? Why?

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Analyzing Cost and Its Role in Decision Making

The concept of opportunity cost and examination of how to calculate the cost of alternatives over single and multiple time periods

Single period decisions are investment decisions that commonly affects only one period, that is, the period in which the investment is made. An example of this is a decision on whether or not to produce and market a new product using the firm's excess capacity.

Multiple period decisions are investment decisions that affect two or more periods. An example of this decision is whether or not to construct a new manufacturing plant and purchase equipment to enable the company to make and sell new product.

Cost considerations

1. Opportunity cost, marginal cost, and relevant cost.

According to Gitman (2006), opportunity costs are cash flows that could be realized from the best alternative use of an owned asset. It represents cash flows that will not be realized as a result of employing that asset in the proposed project.

Marginal costs or ...

Solution Summary

The expert analyzes cost and role in decision making. The expert differentiates between opportunity, marginal, and relevant cost; marginal benefit versus marginal costs

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