12-1 What is a relevant cost?
Answer
A relevant cost is cost that differs in total between the alternatives in a decision.
12-2 Define the following terms: incremental cost, opportunity cost, and sunk cost.
Answer
A
...
12-1 What is a relevant cost?
Answer
A relevant cost is cost that differs in total between the alternatives in a decision.
12-2 Define the following terms: incremental cost, opportunity cost, and sunk cost.
Answer
An increment cost is the change in cost that will result from some proposed action.
An opportunity cost is the benefit that is lost or sacrificed in rejecting some course
of action. A sunk cost is a cost that has already been incurred and can’t be changed
by any future decision.
12-3 Are variable costs always relevant costs? Explain.
Answer
No. Variable costs are relevant costs only if they differ in total between the
alternatives under consideration.
12-4 “Sunk costs are easy to spot—they're the fixed costs associated with a decision.”
Do you agree? Explain.
Answer
No. Not all fixed cost are sunk-only those of which cost has already been
irrevocable incurred. A variable cost can be a sunk cost, if it has already been
incurred.
12-5 “Variable costs and differential costs mean the same thing.” Do you agree? Explain.
Answer
No. A variable cost is a cost that varies in total amount in direct proportion to
changes in the level of activity. A differential cost measures the difference in cost
between two alternatives. If the level of activity is same for the two alternative, a
variable cost will be unaffected and will be irrelevant.
12-6 “All future costs are relevant in decision making.” Do you agree? Why?
Answer
No. Only those future costs that differ between the alternatives under consideration
are relevant.
12-7 Prentice Company is considering dropping one of its product lines. What costs of
the product line would be relevant to this decision? What costs would be irrelevant?
Answer
Only those cost that can be avoided as a result of dropping the product line are
relevant in the decision. Sunk costs and costs that will not differ regardless of
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