Question

Why, in general, are fixed costs not relevant in short term decision making?

Why, in general, are fixed costs not relevant in short term decision making?

Homework Answers

Answer #1

Decisions should be based on the relevant costs that is the incremental cost or the cost which would be incurred if the particular decision is taken. Fixed cost are generally ignored for decision making as the same is sunk cost which is not relevant whether we take a particular decision or not as the same will be incurred in both the cases which means it is not the factor which is to be considered while making the decision. Therefore, costs that have been already incurred in the past are totally irrelevant for any decision that is being made now. Examples of such cost is fixed rent or depreciation etc.

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