Question

Do you believe a firm must have a firm grasp of the concepts of differential cost, opportunity cost and sunk cost to be effective in making business decisions? Please be sure that your first post talks about these three different types of costs. Consider giving examples - especially if you have examples within your own employment experience.  Or - you can look for some online resources that offer you some other facets of this topic to discuss so that it isn't just a rehash of the textbook. Don't forget to cite any resources that you use - even the textbook

Answer 1

Firm must have grasp concepts of different costs so that effective decision making can be done. If the person is aware of the type of cost and how it effects the decision of the enterprise, it can make decisions which are beneficial for the enterprise.

Differential cost is also known as incremental cost. It changes with the change in output. Thus it is the difference between the alternatives. Suppose the cost of producing A =5000 and the cost of producing B is 7000 Differential cost will be 7000-5000 i.e 2000

Opportunity cost refers to the cost of choosing the alternative over another. Opportunity cost= cost of second best alternative. Example: I was doing a job and getting a salary of 10000 but I decided to pursue a course which will cost =5000 and I will have to leave the job  

So the opportunity cost to do the course = 10000 (alternative option) and cost to do the course =5000

Total cost for decision making =15000

Sunk cost are those costs which will incur irrespective of the decision taken. They are irrelevant in decision making process. All fixed costs are sunk costs  

Example : I have to take the decision to manufacture A or B

But for manufacturing purposes I have taken a building on rent =50000

So this rent cost will be incurred whether I produce A or B irrespective of the decision of which product to manufacture  

Whole answer is written in my own words. So I am not citing any resources used.

Do give your feedback!! Happy learning :) :)