Definition: Relevant benefits are the additional gains or revenues a company will receive if it chooses a particular action. In other words, this is the additional income a company will earn if the management decides to pursue one course of action over another. Relevant benefits are used by management to evaluate different strategic options or actions a company can take.
What Does Relevant Benefit Mean?
You can think of it like a list of pros and cons. Management is faced with a list of pros and cons for each business decision it makes. For instance, action 1 might be more cost effective, but action 2 will gain more market share. Managers have to weigh the pros and cons or relevant costs and benefits of choosing either action.
This additional income is relevant in management’s decision making process. For instance, assume a manufacturing plant has been offered a new project, but the new project requires more capacity than the plant currently has. Management must decide whether to expand the plant or turn down the new project.
In this case, the revenues from the new project are relevant benefits because the management will use these potential future earnings to make its expansion decision. By choosing to expand the plant, the company will gain additional revenue. By deciding not to expand, the company will lose these potential benefits. Lost potential benefits are often called opportunity costs because the lost benefits are the cost of choosing not to expand.
Keep in mind, that not all future benefits are relevant. Only those benefits that are useful in decision making are considered relevant.