Relevant Costs in Decision Making... Continued

However, with a replacement approach, labor will be hired and the fence built generating 100,000 at a cost of 110,000 (60,000+50,000) which results in a loss of 10,000.  This later loss is less than the former loss by 2,500 which would not have to be borrowed (or come from your  savings or elsewhere).

The goal here is that when eminent losses are anticipated, an entrepreneur strives to minimize losses by making the decision to take on the contract.

Unutilized Facilities
In some cases, a farmer may have made some investments that due to unexpected circumstances leave them with some idle capacity in form of equipment, space, labor etc. We need to know what needs to be considered in the decision making process should an opportunity arise.

For example, suppose you have leased 200,000 Sq ft for which you are paying 1,000,000 (5/Sq Ft) per year.  Supposing further, that this year, one of your discontinued farming activities, (such as egg production) leaves 50,000 Sq ft of space unused.  If  another, a potential user offers to use that space during the term of the contract when you are paying 5/Sq Ft, would you sublease the space out to her for $125,000 (or $2.50/Sq ft)?

This is a similar concept to inventory valuation above. While rent at $2.50/sq ft is less than lease cost of $5.00/sq ft, it minimizes the lease cost  which you have to pay regardless of whether the space is subleased or not.