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Coming costs

Coming costs are the costs that appear when new products, activities and actions are launched.

If a car owner chooses to replace the car with a new and bigger/better version, incurring additional expenses, such as an increased insurance premium, these additional expenses are defined as coming costs. To purchase a new car is a coming cost, and to have special features installed is also a coming cost.

Going costs

Going costs are defined as cost savings connected to closing down products, sections, etc.

If a car owner chooses to sell the car, all the cost savings are going costs. Reversibility is essential to the going costs. Education of employees or installation of facilities on premises for specific production (e.g. ventilation), are typical coming costs but not going costs.

Sunk costs

Sunk costs are costs that are already paid/invested, and cannot wholly or partially be recovered. Sunk costs cannot be affected or neutralized by a new decision.

With regards to the car case, the re-registration fee is an example of a sunk cost, as this cost was paid when the car was bought and cannot under any circumstances be recovered. For this reason the cost is not to be integrated in any future decision processes.

Other typical examples of sunk costs are ad campaigns, distribution of leaflets, research costs, education of employees etc.

Grocer case 1.5:

A grocer has decided on an advertising initiative involving distribution of a brochure to the local households. The printing will be carried out by a local printing house for 20,000 DKK and the distribution will be taken care of by the local boy scouts, who promised to distribute the brochures for 5,000 DKK. Furthermore the grocer expects an increase in earnings of 30,000 DKK as a result of the advertising campaign.

Unfortunately, as the brochures are ready, the boy scouts report that they cannot carry out the distribution. If the grocer wants the brochure distributed, the post office has to do it, which costs 15,000 DKK. Should the grocer have the brochures distributed or cancel the marketing initiative? Of course the answer depends on the profits of completing the initiative.

In table 1.5 the profit of the initiative is calculated, both with and without the sunk costs

Profit, without sunk costs

Profit, with sunk costs

Increase in earnings

30.000 kr.

Increase in earning

30.000 kr.

- Printing

- Distribution

20.000 kr. 15.000 kr.

- Distribution

15.000 kr.

Profit

-5.000 kr.

Profit

15.000 kr.

Table 1.5: Profits of carrying out the initiative, with or without the sunk costs.

As is obvious from table 1.5 the printing costs are sunk costs, which means that the costs, at the decision-making moment, have been defrayed and cannot be recovered. Furthermore, it is clear that if sunk costs are considered, i.e. if they are not integrated into the decision making process, carrying out the advertising initiative result in a profit of 15,000 DKK. This profit has to be considered on the basis that the only other alternative is not to complete the initiative but still pay the 20,000 DKK for the printing. For this reason, the grocer should continue with the advertising initiative.

Joined costs

Joined costs are the costs that apply to different products in combined production before they are separated in the final production.

An example: the costs of growing and harvesting pineapples that at the factory are separated into pineapple juice and canned pineapples.

Separate costs

Separate costs are costs that apply after products of joined production are separated in the production.

An example of this is the costs of sieving the pineapple juice and the costs of cutting the canned pineapples, which despite the fact that the costs up to that point have been joined, must be treated separately. Joined and separate costs are illustrated in figure 1.5:

Figure 1.5: Costs of pineapple production

Costs of pineapple production

Marginal costs

Marginal costs are the increase in total costs when producing one additional unit.

Marginal costs are often applied in regards to pricing. In the car case the marginal costs are applied in order to find the costs of driving an additional kilometer, or an additional trip, depending on the decision-making situation. Marginal costs are calculated as A costs / A units (in the car case kilometers replaces units), where A symbolizes the amount of change incurred by one unit. Marginal costs (MC) is the most used theoretical term in optimization assignments. The weakness of MC is that the entire discussion of fixed and variable costs reappears. The longer time perspective in the decision-making horizon, the more costs become variable, and thus MC increases.

Difference costs

More problems arise in this category. Sneaking costs ("Can it..."), capacity pressure as well as optimism and pessimism.

 
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