Question

25. What is an opportunity cost? Incremental cost? Sunk cost? Out-of-pocket cost? Relevant Cost? Irrelevant cost?

26. How are costs calculated and prices set under the total cost method?

27. What is meant by sales mix?

Answer 1

1.

a) Opportunit cost: In simple words the loss of other alternative when one alternative is choosen. Opportunity cost is the cost incurred by not enjoying the benfits associated with the best alternative choice.

b) Incremental cost: The cost added by producing one additional unit of product or service. Incremntal cost is extra cost associated with one additional unit of produciton.

c) Sunk Cost: A cost that already been incurred and connot be recovered. Sunk cost should not be considered when making the descision to continue investing in an ongoing project, since these cost cannot be recovered.

d) Direct pocket cost: It is the direct payyment of money that may or may not be later reimburshed from a third party source. For example when operating a vehicle, gasoline, toll and parking fess are considered out of pocket expense/cost.

e) relevant cost: Relevant cost are cost that will be affected by a mangerial descicion.

f) Irrelevant cost: Irrelevant cost are those that will not change in the further when you make one descicion versus another. Example - overhead as these cannot be avoided, committed cost.

2. The total cost method consists of subtracting bid price from the actual cost of performance and adding profit to the resulting amount. The price of goods and services can be calculated by considering all the factors such as product/service, competition, targetetc.

3. Sales mix: Sales mix is the relative portion or ratio of a bsuiness's product that are sold. Sales mix is important because a company's producr usually have different degrees of profitability.

Hope this meets your purpose.

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