Question

The costs listed below relate to a variety of different decision situations. For each cost listed below, indicate if it is relevant or not to the related decision.

Cost Decision Relevant/Irrelevant
1. Unavoidable fixed overhead Eliminate an unprofitable segment
2. Direct labor Make or buy
3. Original cost of old equipment Equipment replacement
4. Joint production costs Sell or process further
5. Opportunity cost Accepting a special order
6. Segment manager’s salary Eliminate an unprofitable segment (manager will be terminated)
7. Cost of new equipment Equipment replacement
8. Incremental production costs Sell or process further
9. Direct materials Equipment replacement (the amount of materials required does not change)
10. Rent expense Purchase or lease a building

Answer 1

Answer: Please Refer to Explanation

Step-by-step explanation:

1. Unavoidable fixed overhead - Eliminate an unprofitable segment. IRRELEVANT.

It is a fixed overhead so it will still occur regardless.

2. Direct labor - Make or buy. RELEVANT. Buying can reduce the direct labour involved in making.

3. Original cost of old equipment - Equipment replacement. IRRELEVANT. It occured in the past and does not matter anymore.

4. Joint production costs - Sell or process further. IRRELEVANT.

5. Opportunity cost - Accepting a special order. RELEVANT.

Can increase cost in business.

6. Segment manager’s salary - Eliminate an unprofitable segment (manager will be terminated). RELEVANT as it eliminating Segment will remove manager's salary.

7. Cost of new equipment - Equipment replacement. RELEVANT because the the cost of the new Equipment determines if we can afford to replace the old one.

8. Incremental production costs - Sell or process further. RELEVANT because incremental costs only apply if product is processed further.

9. Direct materials - Equipment replacement (the amount of materials required does not change). IRRELEVANT if the number of materials required does not change.

10. Rent expense - Purchase or lease a building. RELEVANT because the rent expense only applies if the building is leased.