A-Z Popular Blog Decision Making Search »
Business Strategy
Business Costs
Competitive Advantage

3 Examples of a Relevant Cost

 , updated on
A relevant cost is a future cash cost that is relevant to a particular decision. This is used to exclude sunk costs, committed costs and non-cash costs from decision making as considering these costs is typically illogical. The following are illustrative examples of relevant costs.

Information Technology

A consultant signs a fixed price contract to develop custom software for $1 million. The project doesn't go well and the firm has spend $1.5 million to date on the project. They consider the cost of giving up, meaning that the client will not pay the $1 million fee. They estimate the project will cost $200,000 to complete. In this decision, the $1.5 million is an irrelevant cost as it is a sunk cost that has already occurred. The relevant cost is the $200,000 required to complete the project to be paid $1 million. As such, the consultant decides to complete the project. It would be a logical error to give up on the project due to consideration of the entire $1.7 million cost.


An investor buys a stock for $30 and it goes down to $3. This results in a loss of $20,000. The investor is tempted to buy more of the stock to try to recoup their losses. It is illogical to allow the cost of past losses to influence the current investment decision. The relevant cost is the current $3 price of the stock and whether this represents a value considering the risks.


A firm invests $1 billion to develop a new product. During the project it becomes clear that competitors have surpassed the product. The unit cost of the product is higher then the competition and the product can only be sold at a loss given the current pricing environment. The firm requires at least $25 million in marketing costs to launch the product. Decision makers are tempted to launch since they invested significant costs in development. However, the $25 million in marketing costs is the only relevant cost to the decision. The marketing costs will most likely be lost as the product is essentially unsellable. As such, the firm decides not to launch.
Overview: Relevant Cost
A future cash cost that is relevant to a particular decision.
Related Concepts

Business Costs

This is the complete list of articles we have written about business costs.
Applied Cost
Business Equipment
Capacity Cost
Capital Improvement
Carrying Costs
Closing Costs
Cost Of Capital
Cost Of Revenue
Cost Of Living
Direct Cost
Distress Cost
Fixed Costs
Friction Cost
Employee Costs
Holding Costs
Intangible Cost
Marginal Cost
Operating Cost
Operating Expenses
Legacy Costs
Outlay Cost
Lifetime Cost
Overhead Costs
Menu Costs
Relevant Cost
Normal Costs
Sunk Costs
Tangible Cost
Operational Costs
Travel Expenses
Unit Cost
Opportunity Cost
Variable Costs
Prospective Cost
Semi Variable Cost
Step Costs
Switching Costs
Transaction Costs
If you enjoyed this page, please consider bookmarking Simplicable.

Business Costs

A list of common types of business cost.

Matching Principle

A principle of financial accounting.

Business Costs

A list of common types of business cost.

Cost Escalation

A definition of cost escalation with an example.

Cost Reduction Examples

Common examples of cost reduction.

Cost Estimates

The common types of cost estimate.

Cost Structure

Detailed examples of how to map out the cost structure of a business.

Cost Competition

The definition of cost competition with examples.

Cost Goals

An overview of cost goals with examples.

Decision Making

A list of decision making techniques.

Abilene Paradox

The observation that groups may make collective decisions that are viewed as wrong or irrational by each individual member of the group.

Decision Making Process

A complete guide to the decision making process.

Rational Thought

The difference between rational thought and logic.


The common types of uncertainty in decision making and strategy.

Information Costs

A definition of information costs with examples.

Reverse Brainstorming

A definition of reverse brainstorming with examples.

Decision Fatigue

The definition of decision fatigue with examples.

Devils Advocate

Taking a position that you do not necessarily agree with for the purposes of argument.

Paradox Of Choice

The definition of paradox of choice with examples.
The most popular articles on Simplicable in the past day.

New Articles

Recent posts or updates on Simplicable.
Site Map