# 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}