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Explain why classifying costs as fixed, variable, sunk or relevant is important for decision making. Highlight...

Explain why classifying costs as fixed, variable, sunk or relevant is important for decision making. Highlight any limitations to utilising these classifications for decision making.

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Answer #1

Classifying costs is important as based on this we know which costs are relevant and not relevant for capital budgeting decision making. Fixed and variable are important and effects the net income while sunk costs is not relevant since it is already incurred and do not affect our decision making. Since for decision making we need the costs which affects the future prospects of business.

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