Question

Managers of a discount store chain are considering whether to add a new auto service department. In reaching this decision, the managers should consider: Multiple Choice Direct costs only. Both direct and indirect costs. Neither direct nor indirect costs. Indirect costs but not direct costs.

Answer 1

Both direct and indirect costs

Step-by-step explanation:

Direct costs refer to those costs which can be directly related to and identified with a production activity. These costs often vary with the production level i.e these costs are usually variable in nature. These are usually factory costs. Examples of direct costs are, direct material, direct labor, worker wages etc.

Indirect costs are those costs which are incurred for multiple activities. Such costs cannot be identified and applied to one activity alone. Office expenses, rent for the whole building, utility expenses etc comprise examples of indirect costs.

In the given case, managers of a discount store chain are considering addition of a new auto service department. The addition of such a department will incur both direct and indirect costs in the form of wages, utilities, rent, etc. Thus, the managers need to consider both direct and indirect costs.