In incremental analysis, which costs are considered relevant?

In incremental analysis, which costs are considered relevant?

• A. Sunk costs
• B. Fixed costs that do not change between options
• C. Costs that do not differ between the alternatives
• D. Costs that differ between the alternatives

Answer: (D)

In incremental analysis, focus is on the costs that actually change when a decision is made. These are the costs that matter because they directly affect which option is cheaper or more valuable. Sunk costs are past expenditures that cannot be recovered, so they are ignored. Fixed costs that do not change between options don’t affect the comparison, so they’re not relevant. Costs that do not differ between alternatives also don’t influence the decision, since they occur the same regardless of the choice. Only the costs that differ between alternatives are relevant, as they create the differential impact that drives the decision. For example, when deciding between two suppliers, the relevant costs are the varying purchase prices or variable shipping costs, while identical fixed overhead or already incurred past costs do not affect the choice.

In incremental analysis, focus is on the costs that actually change when a decision is made. These are the costs that matter because they directly affect which option is cheaper or more valuable. Sunk costs are past expenditures that cannot be recovered, so they are ignored. Fixed costs that do not change between options don’t affect the comparison, so they’re not relevant. Costs that do not differ between alternatives also don’t influence the decision, since they occur the same regardless of the choice. Only the costs that differ between alternatives are relevant, as they create the differential impact that drives the decision. For example, when deciding between two suppliers, the relevant costs are the varying purchase prices or variable shipping costs, while identical fixed overhead or already incurred past costs do not affect the choice.