What is the difference between sunk cost and relevant cost? Give an example for each.

Sunk cost and relevant cost are two important concepts that are used to make business decisions. The main difference between them is that sunk costs are costs that have already been incurred and cannot be recovered, while relevant costs are costs that will be incurred in the future and can be affected by a business decision.

Example of Sunk Cost:

A sunk cost is a cost that has already been incurred and cannot be recovered, regardless of the future business decision. For example, a company has invested $10,000 in a marketing campaign for a product that is no longer selling well. The $10,000 spent on the marketing campaign is a sunk cost because it has already been spent and cannot be recovered, even if the company decides to discontinue the product.

Example of Relevant Cost:

A relevant cost is a cost that will be incurred in the future and can be affected by a business decision. For example, a company is deciding whether to accept a special order for a product that requires additional labor and materials. The cost of the additional labor and materials required for the special order are relevant costs because they will be incurred in the future and can be affected by the business decision of whether to accept the order or not.

It is important for businesses to distinguish between these two concepts when making decisions to ensure that they are making the most financially sound choices.

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