Irrelevant costs are not associated with or influenced by management decisions; among these, we can mention the sunk costs, which are ignored when making a business decision (Kenton, 2021). For example, commitments acquired that will last even if the business is carried out or not; personnel that will continue to work even if a particular project is not carried out.
Relevant costs are directly associated with and influenced by the decisions made by management on specific new or closing businesses (Froeb, 2018). Such as raw materials to manufacture products, electricity to operate the machinery that transforms a product, the labor involved in the direct transformation of a product or service, and in general, all costs associated with the transformation of a product or service and only those costs that are directly related to the product or service (Froeb, 2018).
As one of many current examples, I can refer to Tesla and its recent decision to reduce the price of the entire range of cars it offers (15% to 20% reduction). One of the advantages that have characterized the company since its inception is that they have always sought to have a low production cost in all its vehicles, and its constant search to continually improve these numbers has led the company to be a leader in the industry and have the largest market share of EVs in the United States and Canada, currently with 68% but decelerating (Edelstein, 2021). It is very likely that according to a forecast of its market share and the trend for the next few years in which all manufacturers are in need to switch to EVs, Tesla decided ahead of time, and since it can lower
its prices due to its low production costs; to win a battle that it already dominates and that reaffirms its position in the market as a leader in the EV industry. Regarding what can be done differently, Tesla's decision to reduce its prices has been based primarily on
relevant costs; but to what extent and at what price? The brand already suffers criticism about the quality and reliability of its cars in handling and the quality of materials that many consumers consider not top quality (Isidore, 2020). Manufacturing a luxury car should be associated with a higher quality than the market it leads.
References:
Edelstein, S. (2021, November 10). Tesla is losing US EV market share but gaining luxury share, now outselling Mercedes-Benz
. Green Car Reports. https://www.greencarreports.com/news/1134120_tesla-
is-losing-us-ev-market-share-but-gaining-luxury-share-now-outselling-mercedes-benz
Froeb, L., McCann, B.T., Shor, M., & Ward. M.R. (2018). MindTap for
Managerial economics: A problem solving approach (5th ed.). Cengage Learning. ISBN-13: 9781337106580
Isidore, C. (2020, November 19). Model Y reliability woes put Tesla near bottom of consumer reports rating | CNN business
. CNN. https://www.cnn.com/2020/11/19/tech/tesla-model-y-reliability-
consumer-reports/index.html
Kenton, W. (2021, May 23). Irrelevant cost
. Investopedia. https://www.investopedia.com/terms/i/irrelevantcost.asp
