1. Two partners who owns IT Business Solutions, a company supplying specialist software, operate out of an office in Fourways, Johannesburg but have discovered a vacant office building close to Sandton City. One of the partners favours moving to the new location because she believes the additional business gained by moving will exceed the higher rent plus the cost of making the move. The other partner disagree. She argues: " We have already paid for office stationary, business cards and signage that cannot be moved or sold. We have spent so much on our current office that we can't afford to waste this money by moving now." The partners ask you for your advice. Which partner is correct? How would you explain your reasons to them?
We have to consider the concept of relevant cost here.
An item is relevant if it is different between or among decision alternatives. That item is not relevant if it is the same between or among decision alternatives.
Here are some follow-up generalizations. As with all generalizations, there will always be exceptions.
1. In general, sunk costs are not relevant because they ...
The concept of relevant cost is reiterated.