Homework Question on Product Costs
- Prentice Company is considering dropping on of its product lines. What costs of the product line would be relevant to this decision?
- What costs would be irrelevant?
Homework Answer on Product Costs
Prentice Company is considering dropping one of its product lines. What costs of the product line would be relevant to this decision?
The Prentice Company relevant costs differ significantly between dropping and keeping the product line. Such costs are relevant to the company’s decision since they are avoidable. Irrelevant costs will be incurred by the company regardless of the decisions made. Such costs do not have differences between the alternatives, hence not relevant. Moreover, only the costs that can be avoided as a result of the product line dropping will be relevant during the decision.
The costs not to be affected in the course of decision-making will be irrelevant. The costs of the product line that would be relevant to the decision include variable costs since they will differ in total especially between the alternatives that will be under consideration. Future costs will also be relevant in the decision to consider dropping one of its product lines. These will include the future costs that will have relative differences between its alternatives.
What costs would be irrelevant?
The costs that would be irrelevant in the decision include joint costs. Joint costs will be incurred as long as the decision is made regardless of what happens to the product line. Moreover, when making the decision to drop one of its product lines, the company should understand that joint costs will not be avoidable and are, therefore, irrelevant. In addition, sunk costs will also be irrelevant in the decision. They are the fixed costs that significantly relate to any decision to drop a product line especially when the irrevocable is incurred.