Differential cost is simply the cost difference between two separate possible decisions. Business managers often face situations that require choosing a solution out of two or more different alternatives. E.g. If the first solution costs a company Rs. 2,00,000 and the second solution costs Rs. 1,00000, the differential cost between the two solutions is Rs. 1,00000. Similarly, managers may have more than two solutions from which to choose. In that case, managers must specify the two solutions to which the differential cost applies.

Opportunity cost is typically expressed in terms of benefits that are lost when one solution is selected over another. Managers may face solution alternatives that are all appealing in some way. Finding the opportunity costs of each alternative makes managerial decisions more analytical and less instinctual. Two solutions to a problem may appear profitable, but a closer inspection of the opportunity costs might show that one solution could create Rs.50,000 in profit while the other creates Rs.. 45,000. The opportunity cost for picking the latter solution is Rs 5,000.