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Relevant Cost for Decision Making Chapter 13

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Relevant Cost for Decision Making Chapter 13

Page 1 of 62
Chapter 13
Relevant Costs for Decision Making

Solutions to Questions

13-1A relevant cost is a cost that differs in total between the alternatives in a decision.

13-2An incremental cost (or benefit) is the change in cost (or benefit) that will result from some proposed action. An opportunity cost is the benefit that is lost or sacrificed when rejecting some course of action. A sunk cost is a cost that has already been incurred and that cannot be changed by any future decision.

13-3No. Variable costs are relevant costs only if they differ in total between the alternatives under consideration.

13-4No. Not all fixed costs are sunk—only those for which the cost has already been irrevocably incurred. A variable cost can be a sunk cost, if it has already been incurred.

13-5No. A variable cost is a cost that varies in total amount in direct proportion to changes in the level of activity. A differential cost is the difference in cost between two alternatives. If the level of activity is the same for the two alternatives, a variable cost will not be affected and it will be irrelevant.

13-6No. Only those future costs that differ between the alternatives under consideration are relevant.

13-7Only those costs that would be avoided as a result of dropping the product line are relevant in the decision. Costs that will not differ regardless of whether the product line is retained or discontinued are irrelevant.

13-8Not necessarily. An apparent loss may be the result of allocated common costs or of sunk costs that cannot be avoided if the product line is dropped. A product line should be discontinued only if the contribution margin that will be lost as a result of dropping the line is less than the fixed costs that would be avoided. Even in that situation the product line may be retained if its presence promotes the sale of other products.

13-9Allocations of common fixed costs can make a product line (or other segment) appear to be...