Question

• What are relevant and irrelevant costs, and how are they used in differential analysis?
• Why are sunk costs irrelevant when making a decision?

Answer 1

The answer has been presented to the supporting sheet. All the parts has been solved with detailed explanation and calculation. For detailed answer refer to the supporting sheet.

AB C D E F G 1 Answer 3 Part 1) Relevant cost are the cost which are relevant in the decision making process and will be incurred only if a particular offer has been accepted. Example of relevant cost are avoidable fixed cost. Irrelevant cost are the cost which are not relevant for decision making, as these cost are same in both the alternatives or these cost has already been incurred. For example fixed cost These both cost are used in differential analysis to evaluate which option should be used, as relevant cost are important in decision making and irrelevant cost has already incurred or these are same in both the alternatives. 8 Part 2) Sunk cost are the past cost which has already been incurred in the past and does not impact the companys decision making process. Thus these cost become irrelevant for decision making.

Answer 2

sunk cost