Chapter 20 - Summary LO 1 Explain what makes information relevant to a particular business decision. Only information that varies among the alternative courses of action being
considered is relevant to the decision. Costs or revenues that do not vary among
the alternative courses of action are not relevant to the decision. LO 2 Discuss the relevance of opportunity costs, sunk costs, and out-of-pocket costs
in making business decisions. An opportunity cost is the benefit that could have been obtained by pursuing
another course of action. Opportunity costs often are subjective, but they are
important considerations in any business decision. Sunk costs, on the other
hand, have already been incurred as a result of past actions. These costs cannot
be changed regardless of the action taken and are not relevant to the decision
at hand. Out-of-pocket costs will be incurred in the future and are relevant
if they will vary among the possible courses of action. LO 3 Use incremental analysis in common business decisions. Incremental analysis is the technique of comparing one course of action to
another by determining the differences expected to arise in revenue and in costs. LO 4 Discuss how contribution margin can be maximized when one factor limits productive
capacity. Identify the production input factor that limits the amount of output. Then
determine the output mix that maximizes the contribution margin per unit of
the limiting factor. LO 5 Identify nonfinancial considerations and creatively search for better courses
of action. Examples of relevant nonfinancial information include legal and ethical considerations
and the long-run effects of decisions on company image, employee morale, and
the environment. Also, managers should search creatively for alternative courses
of action. Unless a company selects the best possible course of action, it incurs
an opportunity cost. Opportunity costs are not recorded in the accounting records,
but they may determine the success or failure of a business enterprise. Throughout this chapter we have explored how managers identify and use relevant
information to make business decisions. The decisions in our illustrations had
mostly short-run consequences; that is, their impact affected only a single
reporting period. In Chapters 21 through 23 we will learn how budgets are developed
and used to assist managers in short-run planning. In Chapter 24, we will examine
how managers approach decisions having long-run consequences. We will discover
that, unlike short-run decisions, long-run decisions are difficult, if not impossible,
to reverse. | 
2002 McGraw-Hill Higher Education