Relevant Costs

Question 2

What is a relevant cost?

Answer 2

Future cash flow that differs between decision alternatives

Relevant costs are crucial for decision-making as they impact the choice between different options.

Question 3

What is an irrelevant cost?

Answer 3

Cash flow that is the same whichever option is chosen

Irrelevant costs do not affect the decision-making process since they remain constant across alternatives.

Question 4

Define opportunity cost.

Answer 4

Benefit foregone from the next‑best alternative

Opportunity cost is a key concept in economics that emphasizes the potential benefits lost when choosing one alternative over another.

Question 5

What is a sunk cost?

Answer 5

Past expenditure that cannot be recovered or changed by current decisions

Sunk costs should not influence current decision-making, as they are already incurred and cannot be altered.