Explain a situation you have observed (or read about), in which a firm made a decision,...
Question:
Explain a situation you have observed (or read about), in which a firm made a decision, considering irrelevant costs or did not consider relevant costs. What was the outcome of the decision, and what could have been done differently?
Implicit Costs:
Implicit costs are costs that are indirect usually coming from using an already owned asset for one purpose instead of the other. Thus, there is no purchase taking place when incurring an implicit cost.
Answer and Explanation: 1
Coca Cola used to have far more businesses than it does today. It was invested in things such as pharmaceuticals for example. This eventually would change starting the 90's though as Coke realized its managers were using capital freely without realizing their was an opportunity cost associated with it. Thus, Coke started to divest from a lot of these secondary businesses and their economic profit increased as a result. Thus, Coke initially failed to consider relevant costs and eventually remedied this mistake.
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