Learning Objective 1Identify relevant and irrelevant costs and benefits in a decision.Relevant Costs and BenefitsArelevant costis a cost that differs between alternatives.Arelevant benefitis a benefit that differs between alternatives.Identifying Relevant CostsAnavoidable costis a cost that can be eliminated, in whole or in part, bychoosing one alternative over another. Avoidable costs are relevant costs.Unavoidable costs are irrelevant costs.Two broad categories of costs are never relevant in any decision. Theyinclude:Sunk costs.A future cost that does not differ between the alternatives.Keys to Successful Decision-Making1Focus only on relevant costs (also called avoidable costs, differential costs, orincremental costs) and relevant benefits (also called differential benefits orincremental benefits).2Ignore everything else including sunk costs and future costs and benefits thatdo not differ between the alternatives.Different Costs for Different PurposesCosts that are relevant in one decision situation may not be relevant inanother context. Thus, in each decision situation, the manager must examinethe data at hand and isolate the relevant costs.Identifying Relevant CostsCynthia, a Boston student, is considering visiting her friend in New York. Shecan drive or take the train. By car, it is 230 miles to her friend’s apartment. Sheis trying to decide which alternative is less expensive and has gathered thefollowing information:Automobile Costs (based on 10,000 miles driven per year)Annual Costof FixedItemsCost perMile1Annual straight-line depreciation on carP2,800P0.2802Cost of gasoline0.1003Annual cost of auto insurance and license1,3800.1384Maintenance and repairs0.0655Parking fees at school3600.036
