Irrelevant Or Relevant Cost

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 X was struggling to compete with budget airlines on short-haul routes. To attract more passengers willing to pay a premium, they decided to offer complimentary in-flight meals on all flights.
• Irrelevant Cost: The primary factor in the decision was the sunk cost of existing airline kitchens and catering contracts. Airline X saw these as wasted expenses if not utilized for meals.
• Neglected Relevant Costs: Airline X failed to consider:
  • Increased variable costs: The cost of food, packaging, and additional crew to serve meals significantly increased operating expenses per flight.
  • Passenger preferences: Many passengers on short-haul flights might prefer lower fares over complimentary meals they might not even consume.
  • Operational impact: Preparing and serving meals could lead to delays and impact on-time performance.
• Outcome: The introduction of in-flight meals led to:
  • Higher ticket prices: To offset additional costs, Airline X raised fares, pushing them closer to full-service airlines without offering the same amenities.
  • Passenger dissatisfaction: Many passengers who didn't value the meals felt they were paying extra for an unwanted service.
  • Operational inefficiencies: Delays due to meal service tarnished Airline X's reputation for punctuality.
• What Could Have Been Done Differently:
  • Conduct market research: Airline X should have surveyed passengers to gauge their interest in complimentary meals and their willingness to pay a premium for them.
  • Cost-benefit analysis: A comprehensive analysis considering all relevant costs (increased variable costs, potential passenger loss) and potential benefits (increased revenue, passenger satisfaction) was necessary.
  • Explore alternatives: Airline X could have offered in-flight meals for purchase or partnered with onboard retailers to provide a wider range of options without incurring significant additional costs.

Lesson Learned: This example highlights the importance of focusing on relevant costs that directly impact a decision's outcome. Sunk costs should not be the primary driver, and a thorough understanding of customer preferences and operational implications is crucial for making sound business decisions.  

Sample Solution