Relevant-Revenue and Relevant-Cost Analysis of Dropping a Customer Homework Help

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What Is the subject all about?

Relevant costs refer to all the costs that can have an impact in the decision-making process. These are the future costs that are supposed to vary among alternatives. The relevant cost is any cost that has relevance to a decision. In any firm, only these costs are used in taking decisions. The costs, to put briefly, are relevant only when they assist a company executive in a decision that is in sync with the objectives of the top management.

It is often that managers need to select between alternative courses of action while taking decisions. Thus, they are generally interested in every variation between alternatives – that include non-financial as well as financial ones. The overall decision involves financial decisions related to revenues and costs, and a method known as Relevant-cost analysis is used for this purpose.

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What Makes it Important?

This is important as it allows a manager to compare between alternatives. Relevant-cost analysis makes use of two important concepts:

  • Fixed costs, which include fixed administrative & marketing expenses and fixed overhead costs
  • Contribution margin, which includes variable costs and sales revenue

It is usually realized that managers have greater control on their contribution margin as compared to the fixed costs. Although fixed costs can also be altered, managers can get more control over the contribution margin.

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