Relevant Costs in Decision Making... Continued

If the acquisition approach is used, there would be no contract since the net income would be perceived as (– 10,000).  However, if the replacement approach is used, the net income would be perceived as 2,500 and the contract may be signed.

From the decision making perspective, given that materials have already been purchased, and there is therefore an eminent loss, one needs to now think of how to minimize “out-of-pocket” loses by considering the two analyses below.

With acquisition approach, losses are perceived to be 10,000, which may lead to a “do nothing” decision not to hire labor and construct the fence.  But if nothing is done, and the supplies are resold, the actual loss would be 50,000 – 37,500 = 12,500