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The following are the Jensen Corporation's unit costs of making and selling an item at a volume...

Question:

The following are the Jensen Corporation's unit costs of making and selling an item at a volume of 1,000 units per month (which represents the company's capacity): Manufacturing: Direct materials $1.00 Direct labor $2.00 Variable overhead $0.50 Fixed overhead $0.40 Selling and Administrative: Variable $2.00 Fixed $0.80 Assume the company has 50 units left over from last year which have small defects and which will have to be sold at a reduced price for scrap. The sale of these defective units will have no effect on the company's other sales. Which of the following costs is relevant in this decision?

Relevant Cost

Relevant Costing is a part of cost analysis which deals with the future decision making of implementing new products and processes. It is based on a principal that money which could not be earned is equivalent to the losing of money.

Answer and Explanation:

  • The entire manufacturing cost (variable as well as fixed) is a sunk cost because it has already been incurred.
  • Fixed selling and administering cost is irrelevant because it will be incurred whether or not the units are sold.
  • the only cost that remains is the variable selling and distribution cost, this is a relevant cost as it will be incurred only if the units are sold.

Hence the relevant cost is {eq}$2 * 50 =$100 {/eq}


Learn more about this topic:

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Relevant Costs in Eliminating a Product or Segment

from Accounting 301: Applied Managerial Accounting

Chapter 9 / Lesson 12
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