Question

Happiness business is going to host a pizza dinner for clients in its meeting room. There are two alternatives:

Alternative 1: The business just bought an oven for $1,000 a few months ago for the company kitchen, so can make pizzas in the oven. Or

Alternative 2: The business can buy pizzas from a Pizza Hut shop.

In addition, the business is planning to decorate the meeting room just for the dinner and put aside $300 costs for the decoration.

When the business is making a decision whether to make pizzas in the company kitchen or buy pizzas from the Pizza Hut shop, which of the following options is correct?

a)The business should consider the cost of decoration in the decision-making process.

b)The business should not consider the cost of decoration in the decision-making process.

c)The business should consider the cost of the oven in the decision-making process.

d)All of the other options are correct.

Answer 1

Answer is b) the business should not consider the cost of decoration in the decision –making process

The cost of decoration is not relevant because whether pizza is made in house or outsourced decoration is needed and it will be incurred. Hence it should not be considered in decision making. The cost of oven is sunk cost and it should not be considered since it is already incurred. Sunk cost is cost which is incurred in past and not relevant for decision making. The only relevant cost of decision making is cost of making pizza in house and purchase cost from pizza hut.