## Relevant Costs

Relevant costs are costs incurred specifically to a certain decision or alternative. When a certain decision is to be made concerning various options, relevant cost analysis will help in choosing the best decision available, financial-wise.

To determine the impact, let us first compute for the total revenue of divisions A and B:

• Division A total revenue = Division A income + Division A cost
• Division A total revenue = $300,000 +$500,000
• Division A total revenue = $800,000 Note that the$500,000 cost is the amount allocated to two operating divisions. The total cost being allocated is $1 million. • Division B total revenue = Division B income (loss) + Division A cost • Dvision B total revenue = ($100,000) + $500,000 • Division B total revenue =$400,000

Now that we already have the revenue figures, let now compute for the impact if division b is dropped:

• Net increase (decrease) in profit = Net income if Division B is dropped - Net Income if Division B is retained
• Net increase (decrease) in profit = (Division A revenue - Division A cost - Division B cost) - (Division A income - Division B loss)
• Net increase (decrease) in profit = ($800,000 -$500,000 - $500,000) - ($300,000 - $100,00) • Net increase (decrease) in profit = ($200,000) - $200,000 • Net increase (decrease) in profit = ($400,000)

Therefore, if Division B is dropped, the decrease in profit will be \$400,000. 