Question

A cost that will differ according to the alternative activity being considered is called a(n):

A. sunk cost.
B. allocated cost.
C. differential cost.
D. opportunity cost.

Answer 1

A differential cost is a cost that differs according to the alternative activity being considered.

Step-by-step explanation:

The correct answer is C. differential cost.

A differential cost is a cost that differs according to the alternative activity being considered. It represents the difference in costs between two alternatives. For example, if a company is deciding between two manufacturing methods, the differential cost would be the additional costs incurred by choosing one method over the other.

Let's say a company is considering two ways to produce a product - Method A and Method B. The cost of raw materials, labor, and utilities would be the same for both methods. However, Method A requires an additional piece of equipment that costs $10,000, while Method B does not require this equipment. Therefore, the cost of the equipment in Method A is a differential cost.