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John Mill
Future Equipment Manufacturing Company
December 14th 2022
Jason Holloway
Equipment Manufacturer
Proposal for alternative decisions
Dear Mr John Mills
We are pleased to receive the ‘Request for Proposal’ from you, for the help you need with several alternative decisions. As part of the same proposal, we are sending you this letter which will tell you everything about the relevant cost.
Description
Relevant costs are all the costs which are relevant to make a decision. When we see the definition of the relevant cost it can be concluded that all the costs are relevant, but not all costs are relevant as some costs are incurred even if you do not want to therefore they become irrelevant (Dillon and Nash 1978).
The meaning of relevant in the financial world is that ‘any decision that can change the flow of cash either negatively or positively’ is relevant.
The changes in cash flow can be of the following types:
· Increase in the amount paid to the suppliers, creditors or more
· Decrease in the amount paid to the people linked to the firm
· An increase in revenue is earned by the firm
· Decrease in revenue that will be earned by the. Firm
There are many other situations where the cash flow can change.
Where relevant cost is effective
Relevant costs can be effective in making most of the decisions for a firm, but there are many situations/scenarios where costs are not relevant at all, these are:
· Sunk costs: Sunk costs are the money that is already spent and there is no way to recover that back even if the decision is changed. This cost will not be affected if the decision is changed
· Fixed Costs: Another cost which is not relevant is the appointment of the fixed costs which were part of the company previously. Because these costs are not...