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Hello Sir.
My question is w.r.t Gym Business (June 2013) Question related to Risks and Uncertainty..Sir one of the principles of Decision Tree is to draft it based upon Incremental Principles.
However sir for instance if the expansion is undertaken there will be an increase of members from 6000 (members before expansion) to 6500 (members after expansion).
So shouldn’t we base our calculations upon the 500 additional members only?Similarly in case of operational cost which was $80 and in case of expansion it would either increase to $120 or $180.
So shouldn’t in this case too we should focus upon Incremental amounts (i.e. $40 and $100) only?
In case no. can you please tell me why calculations has been based upon figures that has been provided in the answer.
It is not a principle of decision trees at all. The only purpose of a tree is to make it easier to identify all the possible outcomes.
In addition you cannot any longer be required to produce a decision tree in the exam.
Sir i do understand we are not required to draw a decision tree. However i feel a bit unconfident w.r.t decision tree so I’m trying to practice few questions.
And sir it has been specifically mentioned in the Decision Tree article of ACCA.
“The principles of relevant costing are applied throughout – ie only relevant costs and revenues are considered’.
And sir this is the video on ACCA’s YOUTUBE Channel, related to this question where the professor mentions about relevant costing at 02:41.
https://youtu.be/e6zUzKi6H34Which has left be confuse now. Can you please help me
Of course for any decision we only look at the costs that are relevant whatever the particular topic!!. Here we look at the costs that are relevant for each course of action.
You wrote before about using incremental costs. We always look at the incremental/extra costs when making decisions, and that is what we are doing here – looking at the incremental costs/revenues of each decision. That does not mean looking at the extra costs/revenues of one against the other. We look at the costs/revenues for each course of action and then we compare.
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