CW-1 COST-VOLUME-PROFIT ANALYSIS & RELEVANT COST ANALYSIS

Relevant cost

A cost that matters because it changes depending on the choice.
Example: If Annie accepts the charity event, she has to buy extra food. The food cost is relevant.

Irrelevant cost

A cost that does not change, so you ignore it.
Example: If Annie pays rent every month no matter what, rent is irrelevant for deciding whether to take one extra event.

Fixed cost

a cost that stays the same even if you serve more or fewer guests.
Example: Rent, salaried staff, or kitchen lease payments. Annie pays these whether she serves 0 guests or 150 guests.

Variable cost

a cost that changes when the number of guests changes.
Example: More guests means more food, supplies, napkins, and temporary serving staff.

Avoidable cost

a cost you can avoid by choosing not to do something.
Example: If Annie does not cater the charity event, she does not have to buy food for those 150 guests.

Sunk cost

money already spent that cannot be changed. Ignore it.
Example: If Annie already bought kitchen equipment last year, that cost is sunk. It should not affect whether she accepts this charity event.

Opportunity cost

what you give up when you choose one option.
Example: If Annie caters the charity event on Saturday, she gives up a normal Saturday event that pays $40 per guest. That lost profit is an opportunity cost.

Contribution margin

selling price − variable cost. It shows how much each guest helps cover fixed costs and profit.
Example: Charity pays $30 per guest. Variable cost is $23.50 per guest.
So contribution margin = $30 − $23.50 = $6.50 per guest.

Incremental profit

extra profit from choosing one option.
Example: Wednesday charity event gives $6.50 contribution per guest × 150 guests = $975

Regression

a math method used to estimate fixed cost and variable cost from past data.
Example: Annie’s past income statements are used to estimate that variable cost is about $23.50 per guest and fixed cost is about $96,385.

Differential analysis

comparing only the costs and benefits that are different between choices.
Example: Compare Wednesday vs. Saturday by asking: “What changes?” Wednesday has no lost business, but Saturday has lost regular business.

Lost contribution

profit you lose from giving up another option.
Example: Saturday regular event would make $16.50 per guest × 120 guests = $1,980