CRITICAL THINKING
Q1
Explain what revenues and costs are relevant when choosing among alternatives.
Q2
Explain why sunk costs are not considered relevant when choosing among alternatives.
Q3
Assume you are a sophomore in college and are committed to earning an undergraduate
degree. Your current decision is whether to finish college in four consecutive years or
take a year off and work for some extra cash.
a.
Identify at least two revenues or costs that are relevant to making this decision.
Explain why each is relevant.
b. Identify at least two costs that would be considered sunk costs for this decision.
c.
Comment on at least one qualitative consideration for this decision.
Q4
A restaurant is deciding whether it wants to update its image or not. It currently has a
cozy appeal with an outdated décor that is still in good condition, menus and carpet that
need to be replaced anyway, and loyal customers.
Identify for the restaurant management
a.
those costs that are relevant to this decision,
b. those costs that are not differential,
c.
and qualitative considerations.
Q5
Are relevant revenues and relevant costs the only information needed by managers to
select among alternatives? Explain using examples.
Q6
Under what conditions might a manufacturing firm sell a product for less than its longterm price? Why?
Q7
For short-term pricing decisions, what costs are relevant when there is available surplus
capacity? When there is no available surplus capacity?
Chapter 11
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