Question

La Jolla Beverage Products is considering producing a wine cooler that would be a blend of a white wine (W), a rosé wine (R), and fruit juice (F). To meet taste specifications, the wine cooler must consist of at least 50% white wine, at least 10% and no more than 20% rosé, and exactly 30% fruit juice. La Jolla purchases the wine from local wineries and the fruit juice from a processing plant in San Francisco. For the current production period, 10,000 gallons of white wine and 9,000 gallons of rosé wine can be purchased; an unlimited amount of fruit juice can be ordered. The costs for the wine are $1.00 per gallon for the white and $1.20 per gallon for the rose; the fruit juice can be purchased for $0.50 per gallon. La Jolla Beverage Products can sell all of the wine cooler it can produce for $2.70 per gallon.

Is the cost of the wine and fruit juice a sunk cost or a relevant cost in this situation? Explain.
O The cost of the wine and fruit juice is a sunk cost as it does not depend on the production decision made.
O The cost of the wine and fruit juice is a relevant cost as it does not depend on the production decision made.
O The cost of the wine and fruit juice is a relevant cost as it depends on the production decision made.
O The cost of the wine and fruit juice is a sunk cost as it depends on the production decision made.

Answer 1

The cost of the wine and fruit juice in the production of wine coolers at La Jolla Beverage Products is considered a relevant cost because it depends on the production decision made by the company.

Step-by-step explanation:

In the scenario presented, the cost of the wine and fruit juice is a relevant cost as it depends on the production decision made. Relevant costs are costs that will be directly affected by a specific business decision. In this case, the decision to produce the wine cooler dictates the amount of white wine, rosé wine, and fruit juice that La Jolla Beverage Products will purchase and use. Since the costs will vary depending on the production levels, these are not sunk costs — which are costs that have already been incurred and cannot be recovered — but rather variable costs directly tied to the decision to produce and sell the wine coolers.