Differential cost
A difference in cost between two alternatives.
Differential cost, also known as incremental cost, is the difference in cost between two alternative courses of action or options. It represents the additional cost that is incurred by choosing one option over the other.
For example, suppose a company is considering whether to produce a product in-house or outsource it to a third-party manufacturer. If the in-house production would cost $100,000 per year and the outsourcing option would cost $80,000 per year, then the differential cost would be $20,000 ($100,000 – $80,000).
Differential costs can be relevant in decision-making, as they help in comparing the costs and benefits of various options. By considering the differential cost, a company can determine the most cost-effective option that maximizes profit.
It’s worth noting that not all costs are differential costs. Some costs, such as fixed costs, remain the same regardless of the option chosen. Differential costs only include variable costs that change depending on the option selected.
More Answers:
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Understanding Direct Costs: Definition and Examples in Product and Service Delivery