Sunk and Incremental Costs

Sunk costs are expenditures made in the past or that may be made in future as part of contractual agreement. The costs for inventory and future rental payments on a warehouse and contractual commitment to labour unions that must be paid as a long - term lease are sunk costs. They are not affected by decision making therefore, they are regarded as irrelevant for short run analysis.

Marginal or incremental costs play a major role in decision making Marginal cost is the change in the total cost for a unit change in output. It helps in making short run decisions about profit maximising rates of output. While incremental cost is a broader concept and refers to the change in total cost from implementing a particular management decision such as introduction of new product line, undertaking a new advertising campaign, adding a new machine, changing the distribution channel and replacing the old machine.

Since incremental costs can be avoided by not bringing a change in the activity they are also called avoidable or escapable costs. 

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