iscover 1. Define the following terms: relevant cost, incremental cost, opportun
ID: 2531387 • Letter: I
Question
iscover 1. Define the following terms: relevant cost, incremental cost, opportunity cost, and sunk cost. 2. Are variable costs always relevant costs? Explain. 3. "If a product is generating a loss, then it should be discontinued." Do you agree? Explain. 4. How will relating product contribution margins to the amount of the constrained resource they consume help a company maximize its profits? split-off point. product should be sold at the split-off point or processed 5. Define the following terms: joint products, joint costs, and 6. What guideline should be used in determining whether a joint further?Explanation / Answer
Solution 1:
Relevant cost : Relevant cost are avoidable costs that are incurred when making business decisions. The concept of relevant cost is used to eliminate unnecessary data (Like unavoidable cost) that are irrelevant for decision making process.
Incremental cost: An incremental cost is the change in cost that will result from some proposed action.
Opportunity cost: An opportunity cost is the benefit that is lost on rejecting some proposal. Opportunity cost is the benefit from next best opportunity.
Sunk cost: Sunk cost is a cost that is already incurred and irrelevant for decision making
Solution 2:
No. Variable costs are relevant costs only if they differ across different alternatives
Solution 3:
If a product is generating loss, then it is not necessary that it should be discontinued. An apparent loss may be the result of allocated common costs or of sunk costs that are unavoidable if the product line is discontinued. A product line should be discontinued only if the contribution margin that will be lost as a result of dropping the line is less than the fixed costs that would be avoided.
Solution 4:
If resoures are constrained then company will manufacture those product that provides highest contribution margin per unit for constrained resourse. Therefore product contribution margin to the amount of constrained resource help a company to maximize its profit.
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