Question

In deciding whether to drop an unprofitable operation, which of the following costs are relevant? Select all that apply.

A :
direct fixed costs
B :
contribution margin of complementary products
C :
sunk costs
D :
indirect cost
E :
contribution margin
F :
segment margin

Answer 1

In deciding whether to drop an unprofitable operation, the relevant costs are direct fixed costs, contribution margin, and segment margin. Sunk costs are not relevant as they are past costs and cannot be changed. The contribution margin of complementary products is also relevant only if it is affected by the decision.

Step-by-step explanation:

When deciding whether to drop an unprofitable operation, not all costs are relevant. In looking at the options provided: direct fixed costs (A), contribution margin of complementary products (B), sunk costs (C), indirect cost (D), contribution margin (E), and segment margin (F), we can evaluate their relevance.

Relevant costs are those that will be affected by the decision and those that will occur in the future. Therefore, sunk costs (C) are not relevant because they are past costs that cannot be recovered or changed. In contrast, direct fixed costs that can be avoided if the operation is dropped, the contribution margin that would be lost, and the segment margin are all relevant.

If dropping the operation affects the contribution margin of complementary products (B), this would also be relevant. However, indirect costs (D) may or may not be relevant depending on whether they are avoidable and directly attributable to the unprofitable operation.