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John, I am really sorry for inundating you – I really am, genuinely, very grateful. May I please run the following scenario past you?
A company has an existing contact (contract A), it can be rescinded, subject to a penalty to take on contract B.
The original contract (contract A) provides spare capacity, this space can earn rent from subletting arrangements, but contract B would utilise all productive capacity and therefore prevent any subletting.
Question: Prepare a comparative statement to assess the net benefit of picking one contract over the other.
1. Would it be correct to list all the relevant costs and relevant incomes (future incremental cash flows) for both projects, side-by-side and then compare the net incremental gains and losses?
2. Could we show the subletting rent as both an incremental cash inflow for contract A, but an incremental cost (opportunity cost) for contract B, because choosing contract B would mean sacrifice the subletting income?
Thank you, thank you, thank you.
1. In principle that would be fine. However just be careful to remember that the decision is not ‘is A worthwhile’ and separately ‘is B worthwhile’. The decision is as to whether to change to B or not. So what we need to look at is the incremental costs and benefits just of moving from one to the other.
So as a result, with regard to your second point, the subletting rent is only a cost (lost income) if there is the move to B. If you are showing two statements then you could either show it as being income for staying with A, or alternatively you could show it as an opportunity cost of doing B – but not both (it would be dealing with it twice).
Whether you showed it as income for A, or alternatively as a cost for B, then difference between the two statements would be the same.
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