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  Slide 1.1 Atrilland McLaney, Management Accounting for Decision Makers PowerPointson the Web , 8 th edition © Pearson Education Limited 2015 Relevant Costs for Decision Making  Slide 1.2 Atrilland McLaney, Management Accounting for Decision Makers PowerPointson the Web , 8 th edition © Pearson Education Limited 2015 Cost Concepts for Decision Making   A relevant cost is a cost that iff rs   between alternatives. An   avoidable cost   can be eliminated, in whole or in part, by   choosing one alternative over another. Avoidable costs are relevant costs. Unavoidable costs are irrelevant costs.  Slide 1.3 Atrilland McLaney, Management Accounting for Decision Makers PowerPointson the Web , 8 th edition © Pearson Education Limited 2015 Relevant Cost Analysis: A Two -Step Process Eliminate costs and benefits that do not differ between alternatives.Use the remaining costs and benefits that differ between alternatives in making the decision . Step 1 Step 2Costs that are relevant in one decision situation may not be relevant in another context.  Slide 1.4 Atrilland McLaney, Management Accounting for Decision Makers PowerPointson the Web , 8 th edition © Pearson Education Limited 2015 Total and Differential Cost Approaches The management of a company is considering a new labor saving machine that rents for $3,000 per year. Data about the company’s annual sales and costs with and without the new machine are:  Current Situation Situation With New Machine Differential Costs and Benefits Sales (5,000 units @ $40 per unit)200,000$ 200,000$ -  Less variable expenses: Direct materials (5,000 units @ $14 per unit)70,000 70,000 -  Direct labor (5,000 units @ $8 and $5 per unit)40,000 25,000 15,000  Variable overhead (5,000 units @ $2 per unit)10,000 10,000 -  Total variable expenses120,000 105,000 -  Contribution margin80,000 95,000 15,000  Less fixed expense: Other62,000 62,000 -  Rent on new machine- 3,000 (3,000)  Total fixed expenses62,000 65,000 (3,000)  Net operating income18,000$ 30,000$ 12,000 
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