Which costs actually matter when choosing between business options?
Identify relevant costs and apply them to short-term decisions such as special orders and make-or-buy
Relevant costs are future costs that differ between options; sunk costs and unavoidable fixed costs are irrelevant. Applying this to special orders and make-or-buy choices isolates the figures that change the decision.
Reviewed by: AI editorial process; not yet individually human-reviewed
Have a quick question? Jump to the Q&A page
Jump to a section
What this dot point is asking
You need to classify costs as relevant or irrelevant and apply relevant costing to common short-term decisions.
What makes a cost relevant
The test is simple: ask whether the cost is in the future and whether it changes with the choice. If both are yes, include it; otherwise ignore it.
Special order decisions
A special order is a one-off sale, often below normal price. It is worth accepting in the short term if the price exceeds the relevant (usually variable) cost per unit and there is spare capacity, because existing fixed costs are already covered by normal trading.
Make-or-buy decisions
In a make-or-buy choice the business compares the relevant cost of producing internally with the price of buying from outside.
Why qualitative factors still count
Relevant costing gives the financial answer, but decisions also depend on factors the numbers miss: supplier reliability, quality, the effect of a low special-order price on regular customers, and spare capacity. The cost analysis informs the decision; it does not make it alone.
Exam-style practice questions
Practice questions written in the style of SACE Board exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.
2021 SACE Stage 24 marksBeau is investigating a new drink, the Mint Fauxito. He expects to sell 200 for 7 for ingredients and 1,500 for the period. He says it is only worthwhile if it makes a profit of $1,200 for the period. Advise Beau whether he should introduce the drink, showing your calculations.Show worked answer →
Compare the additional (relevant) revenue and costs of the decision.
Additional revenue = 200 x 5,200.
Variable cost per drink = 5 bottle = 12 = $2,400.
Contribution = 5,200 - 2,400 = $2,800.
Less the additional fixed cost of hiring the machine = $1,500.
Forecast profit = 2,800 - 1,500 = $1,300.
Advice: the 1,200 target, so on the figures he should introduce the Mint Fauxito. The machine hire is a relevant cost because it only arises if he makes the drink. Any existing fixed costs that do not change are irrelevant. Markers reward a clear contribution calculation, deducting only the relevant additional fixed cost, and a recommendation that compares the 1,200 target.