Explain the concept of incremental (differential) cost in decision making.

Explain the concept of incremental (differential) cost in decision making.

• A. The additional costs or savings that would result from selecting one alternative over another; only costs that differ between options are relevant.
• B. All costs that do not change between options.
• C. Sunk costs that should not be considered.
• D. The total cost of the chosen option.

Answer: (A)

Incremental (differential) cost is the extra amount that changes when you move from one alternative to another—the additional cost you would incur or the savings you would gain as a result of the choice. In decision making, you look at costs that differ between options because those are the costs that actually affect which option is more economical. Costs that stay the same regardless of the choice don’t influence the decision, and sunk costs are not considered since they’ve already been incurred. Focusing on the total cost of the chosen option mixes in costs that don’t change with the decision, so it doesn’t reveal which alternative is truly cheaper. This is why the concept centers on the differences—the incremental costs and savings—between options.

Incremental (differential) cost is the extra amount that changes when you move from one alternative to another—the additional cost you would incur or the savings you would gain as a result of the choice. In decision making, you look at costs that differ between options because those are the costs that actually affect which option is more economical. Costs that stay the same regardless of the choice don’t influence the decision, and sunk costs are not considered since they’ve already been incurred. Focusing on the total cost of the chosen option mixes in costs that don’t change with the decision, so it doesn’t reveal which alternative is truly cheaper. This is why the concept centers on the differences—the incremental costs and savings—between options.