Question

Springfield Acting Co. is a professional actor training group that trains stage actors and is headquartered in Los Angeles. The CEO of the company, Milhouse Van Houton, is considering expanding and opening an office in New York City but he just received an interesting business opportunity in the San Francisco area to partner with a movie production company located there. Milhouse knows he can only accept one of these opportunities at the current time. He has already purchased his non-refundable ticket to New York, but his hotel reservation is still cancelable. The cost of each trip is outlined below.

Cost of New York trip		Cost of SanFran trip
Airfare	$525	Mileage	$250
Meals	$200	Meals	$300
Hotel	$650	Hotel	$500
Taxis	$100

Required:

1. What are the relevant costs of each trip?
2. What is the incremental cost?
3. Without considering qualitative factors (thus use numbers to analyze), which alternative should Milhouse choose? Why?
4. What are two qualitative factors that Milhouse might consider?

Answer 1

1) Relevant costs' can be defined as any cost relevant to a decision

Relevant cost of each trip :

Particular	Cost of New york trip($)		Particular	Cost of Sanfrancisco Trip($)
Airfare	525		Mileage	250
Meals	200		Meals	300
Hotel	650		Hotel	500
Taxis	100
Total	1475		Total	1050

2) Incremental costs are the changes in future costs and that will occur as a result of a decision

Incremental Costs = Cost of new york trip - cost of Sanfrancisco trip

= 1475 - 1050

= 425

3) Total trip cost to new york = $ 1475

Total trip cost to Sanfrancisco = $ 1050

As the cost of trip to Sanfrancisco is less than cost of new york trip , Sanfrancisco option is preferrable

4) Two qualitative factors that Milhouse might consider :

• Good opportunity to expand his business and opportuinty for the traniees as well
• Partnership offers to him by the movie production company in san fransisco.