Irrelevant Or Relevant Cost

Sample Solution

Here's an example of a firm making a decision based on irrelevant costs and neglecting relevant ones:

Case Study: Airline Adds In-Flight Meals

• Airline: A struggling budget airline known for its low fares decides to add complimentary in-flight meals to compete with established airlines.

• Irrelevant Cost: The airline's management focused heavily on the upfront cost of purchasing and catering the meals. They viewed this as the primary expense associated with offering in-flight meals.

Full Answer Section

• Neglected Relevant Costs: They failed to consider several significant relevant costs:
  • Increased weight onboard: Meals add weight to the aircraft, impacting fuel efficiency and increasing fuel costs.
  • Labor costs: Additional flight attendants might be needed to serve meals, especially on longer flights.
  • Waste disposal: Food waste disposal at airports adds additional costs.
  • Meal service time: Serving meals can extend turnaround times between flights, potentially causing delays and schedule disruptions.
• Outcome: The airline experienced a significant increase in operating costs due to the neglected factors. The added costs outweighed any potential gains in ridership, and the airline ultimately had to cut back on the in-flight meal program. Their profit margins remained low, and they lost some customers who were attracted to the initial idea of complimentary meals.
• What could have been done differently?
  • Comprehensive Cost Analysis: A thorough cost analysis should have considered all relevant costs, including fuel cost increases, labor, waste disposal, and potential delays.
  • Market Research: Researching customer preferences would have shown if budget-conscious travelers truly valued in-flight meals over low fares.
  • Pilot Program: A pilot program on a limited number of flights could have helped assess the actual costs and customer response before a full rollout.