ill has just returned from a duck hunting trip. He has brought home eight ducks.
ID: 2567919 • Letter: I
Question
ill has just returned from a duck hunting trip. He has brought home eight ducks. Bill’s friend, John, disapproves of duck hunting, and to discourage Bill from further hunting, John has presented him with the following cost estimate per duck:
Camper and equipment:
Cost, $1,800; usable for eight seasons; 10 hunting trips per season $ 180.00
Travel expense (pickup truck):
100 miles at $0.40 per mile (gas, oil, and tires—$0.26 per mile; depreciation and insurance —$0.14 per mile) 40.00
Shotgun shells (two boxes) 40.00
Boat:
Cost, $2,720, usable for eight seasons; 10 hunting trips per season 34.00
Hunting license:
Cost, $70 for the season; 10 hunting trips per season 7.00
Money lost playing poker:
Loss, $26 (Bill plays poker every weekend) 26.00
Bottle of whiskey:
Cost, $15 (used to ward off the cold) 15.00
Total cost $ 342.00
Cost per duck ($342.00 ÷ 8 ducks) $ 42.75
Required:
1.
Assuming that the duck hunting trip Bill has just completed is typical, what costs are relevant to a decision as to whether Bill should go duck hunting again this season?
2.
Suppose that Bill gets lucky on his next hunting trip and shoots 10 ducks in the amount of time it took him to shoot 8 ducks on his last trip. How much would it have cost him to shoot the last two ducks?
Cost of last two ducks
Explanation / Answer
The question asks for the Relevant Costs, which should account for deciding whether Bill should undertake one more season of duck hunt.
Relevant Costs are those costs, which carry information that is important enough to take or change a decision. Hence, Relevant Costs are Important.
Those costs which will be affected by present or future decisions can be counted as relevant. Also, costs if same in different alternatives are not relevant, because they will always be present (or incurred), whatever alternative is chosen. Costs already incurred are Sunk Costs, since the money has been already spent on them. As a result, they prove irrelevant while taking future decisions.
Hence as a general corollary it can be concluded that, Relevant Costs are –
1. Calculation of Relevant Costs for Bill
In this case, all costs which are relevant to Bill to decide and go for one more duck hunt season will be:
Notes:
2. Cost of Shooting Additional 2 Ducks
Since all Relevant Costs have already been incurred, it will not cost anything really for Bill to shoot two or more ducks for that matter. However, average cost per duck to Bill will fall.
Please feel free to ask for any clarifications! :)
Description $Amount Travel Expenses (up to the tune of $0.26 per mile for 100 miles) $26 Shotgun Shells $40 Bottle of Whiskey $15 Total Cost $81Related Questions
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