How many decisions have you made today?

Maybe you made a big decision, such as investing in a mutual fund. Or a simple one such as buying a coffee maker or choosing a restaurant for dinner. Regardless of the decision, the decision process often includes evaluating the costs and benefits of each choice. For decisions that involve costs, some costs are irrelevant. For example, once you purchase a coffee maker, its cost is irrelevant when calculating how much money you save each time you brew coffee at home versus buy it at Starbucks. You incurred the cost of the coffee maker in the past, and you can’t recoup that cost. This chapter will explain which costs and benefits are relevant and which are not—and how you should think of them when choosing among alternatives.

Relevant Costs And Broadway Shows^*

The incremental cost to a Broadway producer for an additional customer to attend a show like “Hamilton” is incredibly small. Most costs (actor fees, performance sets, theater rental, and publicity and marketing) are fixed weeks and months in advance of the performance. An orchestra ticket for “Hamilton” sells for $200. But because incremental costs are so small, should the show’s producer sell tickets considerably below this price to fill empty seats?

If demand is high and the show is sold out, the producer would not sell tickets for anything less than $200 because there are theatergoers willing to pay full price to see the show. But if on the day before the show the venue will not be full, the producer may be willing to lower ticket prices significantly to attract more theatergoers and earn a profit on the unfilled seats.

Enter TKTS. The famous discount ticket booth in Times Square sells same-day tickets to Broadway musicals, plays, and dance productions for up to 50% of face value. Theatergoers can browse real-time listings on the TKTS mobile app to check availability.

Francis Vachon/Alamy Stock Photo

Just like on Broadway, managers at corporations around the world use their deep understanding of costs to make decisions. JPMorgan Chase managers gather information about financial markets, consumer preferences, economic trends, and costs before determining whether to offer a new service to customers. Managers at Macy’s obtain information about customer demand and costs of buying products when pricing merchandise at its retail stores. Managers at Porsche gather cost information to decide whether to manufacture a component part or purchase it from a supplier. The decision process may not always be easy, but as Peter Drucker said, “Wherever you see a successful business, someone once made a courageous decision.”