Relevant Costs for Decision Making
Solutions to Questions
11-1 A relevant cost is a cost that differs between alternatives in a decision.
11-2 An 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 by not taking some course of action. A sunk cost is a cost that has already been incurred, and that cannot be changed by any future decision.
11-3 No. Variable costs are relevant costs only if they differ in total between the alternatives under consideration.
11-4 The original cost of a machine that the company already owns is a sunk cost that cannot differ between any two alternatives pertaining to the future, and hence cannot be a relevant cost.
11-5 No. Not all fixed costs are sunk—only those for which an irrevocable cost outlay has already been made. A variable cost can be a sunk cost, if it has already been incurred.
11-6 No. 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.
11-7 No. Only those future costs that differ between alternatives are relevant costs in decisions.
11-8 Only those costs that can be avoided as a result of dropping the product line are relevant in the decision. Sunk costs and costs that will not differ regardless of whether the line is retained or discontinued are irrelevant.
11-9 No. An apparent product line loss may be the result of allocated common costs or of sunk costs that will continue even if the product line were eliminated. 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 can be avoided. Even then there may be arguments in favor of retaining the product line if its presence promotes the sale of other products.
11-10 Allocations of