Relevant costs are also called differential costs. If the future costs are going to be incurred regardless of the decision that is made, those costs are not relevant. Sunk costs are never relevant.
The repair cost of $26000 is relevant to the decision on hand whether to sell the truck or get it repaired. The sale proceeds offered by repair shop of $10000 is also relevant. The purchase cost of used truck of $ 34000 is relevant to the decision.
The amount offered by the insurance company of $30000 would be the same whether Pizzahut gets the truck repaired or disposes the truck and purchases the used truck. Since the amount is same under both the alternatives it is a non-relevant cost. Similarly, the original cost of truck of $50000 is a sunk cost and would be same under both the alternatives and hence it is also a non-relevant cost. The classification of costs into Relevant and non-relevant costs aids in decision making. The cost with respect to the alternative of disposing the truck is $34000 - $10000 which is equal to $24000. Thus, the gain to the company in choosing this alternative is $26000(cost of repair) minus $24000, which is $2000. Thus, the analysis helped the company reach a decision which resulted in a gain of $2000 to the company.
1. Dennis Caplan, Management Accounting: Concepts and Techniques, Retrieved on December 21st 2009, from Oregon State University, College of Business Web Site, ...
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