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.

Answer 1

Differential costs is the difference of costs between two alternatives or due to changes in the level of output. Opportunity cost is the cost of foregoing an alternative opportunity for the chosen decision. Sunk cost is the preliminary cost that is incurred on research ,pooling of resources before a project or business is started. A business must grasp these cost concepts are the accounting for these becomes very crucial. Also decision making on the basis of these costs helps in determining the value of the investment. Sunk cost is something that cannot be recovered and has been already been incurred. The same cannot be accounted for as well. Opportunity cost is critical to determine the cost of foregoing an alternative and the proposed decision must cover the profits from an alternative decision as well. Differential costs is important to chose a single options among multiple options and usually the project with the least cost is chosen.