To decide to adopt a short term decision such as to drop a segment, you should consider which types of costs?
a. Sunk costs
b. Past costs
c. Historical costs
d. Variable costs
Decision making related to keeping a segment or dropping a segment is based on relevant cost analysis. The incremental approach is preferred for such decision making.
Answer and Explanation:
The correct answer is option (d).
To decide to adopt a short term decision such as to drop a segment, variable costs are considered.
Explanation: To decide to adopt a short term decision such as to drop a segment, variable costs are considered as the sunk cost (which is the past cost or historical cost) is irrelevant for this type of decision making. The variable costs are relevant for this type of decision.
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from Accounting 301: Applied Managerial AccountingChapter 9 / Lesson 12