Differential costs
In one sentenceThe difference in cost between two or more alternatives when choosing between them; only what differs from one alternative to another matters.
Simply put
When comparing two options, costs that are equal in both do not affect the decision. Focus only on the difference.
This shortens the calculation and keeps you from getting lost in figures that have nothing to do with the choice.
Worked example
A distribution establishment is comparing delivering orders with its own vehicle against contracting a shipping company.
Monthly cost of delivery with its own vehicle12,000 SAR
Monthly cost of the shipping company9,500 SAR
Differential cost in favor of the shipping company12,000 − 9,500 = 2,500 SAR
Formula: Cost of the first alternative − cost of the second alternative
Don't confuse it with
Relevant costsRelevant costs are all future costs that differ between alternatives, while differential cost is the size of that difference.