Active learning ideas
Relevant information for short-term decisions focuses on identifying which costs and revenues will change as a result of a specific choice. Students learn to ignore 'sunk costs' and focus on incremental and opportunity costs. This is a critical skill for business managers who must make decisions like whether to 'make or buy' a component, accept a 'special order' at a lower price, or drop an unprofitable product line.
Activity 01
Students act as a production manager (who wants to make) and a purchasing manager (who wants to buy from an external supplier). They must present their relevant cost analysis to the 'CEO' to justify their position.
What makes a cost relevant to a specific decision?
Activity 02
Groups are given a request for a one-time order at a price below the total cost but above the variable cost. They must identify the relevant costs and qualitative factors (like impact on existing customers) before making a recommendation.
How do opportunity costs factor into make-or-buy decisions?
Activity 03
Students are given a scenario where $100,000 has already been spent on a failed project. They individually decide whether to spend another $20,000 to finish it, then pair up to discuss why the $100,000 should not influence their decision.
When should a company accept a special order below normal selling price?
A few notes on teaching this unit
Watch Out for These Misconceptions
All fixed costs are irrelevant.
Only *unavoidable* fixed costs are irrelevant. If a fixed cost can be saved by dropping a product line (avoidable fixed cost), it becomes relevant to the decision. Peer-led 'cost sorting' exercises help students distinguish between avoidable and unavoidable costs.
A product line should always be dropped if it shows a net loss.
If the product line still provides a positive contribution margin that covers some unavoidable fixed costs, dropping it might actually decrease the company's total profit. Using a 'before and after' profit table in groups helps students see the total impact on the business.
Methods used in this brief
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