Question

Bill has just returned from a duck hunting trip. He brought home eight ducks. Bill’s friend, John, disapproves of duck hunting, and to discourage Bill from further hunting, John presented him with the following cost estimate per duck: Camper and equipment: Cost, $15,000; usable for eight seasons; 12 hunting trips per season $ 156 Travel expense (pickup truck): 100 miles at $0.39 per mile (gas, oil, and tires—$0.28 per mile; depreciation and insurance—$0.11 per mile) 39 Shotgun shells (two boxes per hunting trip) 25 Boat: Cost, $2,080, usable for eight seasons; 12 hunting trips per season 22 Hunting license: Cost, $80 for the season; 12 hunting trips per season 7 Money lost playing poker: Loss, $36 (Bill plays poker every weekend whether he goes hunting or stays at home) 36 Bottle of whiskey: Cost, $25 per hunting trip (used to ward off the cold) 25 Total cost $ 310 Cost per duck ($310 ÷ 8 ducks) $ 39 Required: 1. Assuming the duck hunting trip Bill has just completed is typical, what costs are relevant to a decision as to whether Bill should go duck hunting again this season? 2. Suppose Bill gets lucky on his next hunting trip and shoots 12 ducks using the same amount of shotgun shells he used on his previous hunting trip to bag 8 ducks. How much would it have cost him to shoot the last two ducks?

Answer 1

Solution

1. Relevant costs per hunting trip:

Statement showing relevant costs per hunting trip:
Travel expenses - pickup truck (gas, oil and tires)	$28.00
shotgun shells - two boxes	$25.00
Bottle of Whiskey	$25.00
total cost per hunting trip	$78.00

1. Cost of the last two ducks shot by Bill –

The cost of last two ducks shot by Bill is zero. The information about the costs – both relevant and irrelevant is related to the hunting trip and remains unaltered regardless of the number of ducks Bill shoots. The costs remain the same whether Bill shoots any ducks, hence Bill does not incur any additional cost to shoot the last two ducks.

All the above costs are incurred to enable Bill to be able to hunt ducks and would remain the same, irrespective of the number of ducks Bill shoots.

The most relevant cost of shooting a duck would be the cost of shotgun shells.

Also there is no information about the opportunity cost of time that Bill spends hunting, so there is no cost attached to the time that Bill takes to shoot the last two ducks, hence again it is immaterial how many ducks Bill shoots on an hunting trip.

Camper and equipment cost is already incurred and is not affected by the additional trips. Similarly, costs of pickup truck and boat are already incurred and would not be altered with one more hunting trip.

Depreciation and insurance on pickup truck is a seasonal cost and hence not relevant, as they are to be incurred regardless of going on a hunting trip or not.

However, the resale value of the camper and equipment, boat and pickup truck are relevant.

The money lost playing poker is not relevant as Bill would play poker every weekend, regardless of whether he goes on a hunting trip.

The other relevant costs stated above are relevant to the decision of going on a hunting trip and hence not related to the number of ducks shot. The costs would not be altered by the number of ducks bill shoots.

However, since these costs are drawn by John to convince Bill to give up hunting, all the costs would be relevant, since these costs would not be originally incurred if Bill had no plan to go hunting. To conclude, the relevancy of a cost item depends upon the decision nature as well alongside being a sunk cost or variable cost.