Question

A company with various segments (referred to as "divisions") is considering whether to drop its Orange County division. For each the costs described below, indicate whether the cost is avoidable or unavoidable by choosing the related drop-down menu item.

1. Wages paid to the Orange County division employees who work directly for this division and will be discharged if the division is dropped.
2. General administrative expenses allocated to the Orange County division on the basis of sales dollars.
3. Depreciation expense on previously purchased machinery that is used in the Orange County division; the machinery will have no other use or resale value if the division is dropped.
4. Rent paid for the building that houses only the Orange County division.
5. The amount of rent paid to lease a private jet for use by the company's management that is allocated to the Orange County division.

Answer 1

1. Avoidable.

These wages are avoidable because they will stop being paid if the division is dropped.

2. Unavoidable.

These are general administrative expenses which means that they will still be incurred regardless of if the division is dropped. They are therefore unavoidable.

3. Unavoidable.

As the machine has no other use or resale value if the division is dropped, the depreciation expense will still be incurred even if the division is dropped so this cost is unavoidable.

4. Avoidable.

Company will no longer have to pay rent if the division is dropped so this expense is an avoidable cost.

5. Unavoidable.

This cost will still be incurred by the company regardless of if the division is dropped because it is an administrative cost at company level. It is therefore unavoidable.