Relevant Costs Two partners who own Progressive Business Solutions, which curren
ID: 1238359 • Letter: R
Question
Relevant CostsTwo partners who own Progressive Business Solutions, which currently operates out of an office in a small town near Boston, just discovered a vacancy in an office building in downtown Boston. One of the partners favors moving downtown because she believes the additional business gained by moving downtown will exceed the higher rent at the downtown location plus the cost of making the move. The other partner at PBS opposes moving downtown. He argues, "We have already paid for the office stationery, business cards, and a large sign that cannot be moved or sold. We have spent so much on our current office that we can't afford to waste this money by moving now." Evaluate the second partner's advice not to move downtown. Illustrate and fully explain using an example of relevant cost (a cost whose value does affect the optimal decision) and an example of irrelevant cost (a cost whose value does not affect the optimal decision) to the business regarding this decision.
Explanation / Answer
Office stationery, business cards, and a large sign that cannot be moved or sold are all sunk costs and thus irrelevant to the decision to move. These costs exist regardless whether or not they decide to move, only costs that are mutually exclusive to either choice should be considered.