Two partners who own Progressive Business Solutions, which currenlty operates ou

Question

Two partners who own Progressive Business Solutions, which currenlty operates out of an office in a small town near Boston, just discovered a vacancy in an office building in downtown Boston. One of the partners favors moving downtown because she believes the additional business gained by moving downtown will exceed the higher rent at th downtown loaction plus the cost of making the move. THe other parnter at the PBS opposes the moves. He aruges, "we ahve already paid for office stationery, business cards, and a large sign that connot be moved or sold. We have spent so much on our current location that we can't afford to waste this money by moving now." Evaluate the second partner's advice not to move downtown.

Explanation / Answer

Relevant cost 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 cannot be avoided in a decision. They have already been incurred or are committed to be incurred in the future. Remember that committed costs are a form of sunk costs. 2. In general, historical costs are not relevant because they will be the same regardless of the option made. (The major exception is the impact of historical costs on taxes.) An alternative is the use of current market prices for assets. 3. In general, opportunity costs are relevant if the opportunities are different between or among the options. Thus the second partner's focus is incorrect. He is looking the sunk cost, which should not be considered. Thus one should evaluate the opportunity cost of moving to the downtown and compare it with the benefits. If the benefits exceed the opportunity cost then the organization can move to down town.

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