Question

1. The following costs relate to a variety of decision settings:

	Cost		Decision
1.	Allocated corporate overhead		Closing a money-losing department
2.	Cost of an old car		Vehicle replacement
3.	Direct materials		Make or buy a product
4.	Salary of marketing manager		Project discontinuance; manager to be transferred elsewhere in the firm
5.	Home theater installation		Purchase of a new home
6.	Unavoidable fixed overhead		Plant closure
7.	Research expenditures incurred last year, related to new product		Product introduction to marketplace
8.	$4 million advertising program		Whether to promote product A or B with the $4 million program
9.	Manufactured cost of existing inventory		Whether to discard the goods or sell them to a third-world country

Required:
Consider each of the nine costs listed and determine whether it is relevant or irrelevant to the decision cited. If the cost is irrelevant, briefly explain why.

Answer 1

1	Irrelivant-Corporate Overhead will be incurred irrespective of fact that any department will be closed or not
2	Irrelivant-Cost of Old car is a Sunk cost
3	Relevant Cost-Direct material is a part of cost of product and hence will be considered for make or buy decision
4	Irrelivant-Market manager will be paid salary irrespective of fact that any project will be closed or not
5	Relevant Cost-The cost of Home theater shall include the installation cost
6	Irrelivant-Unavoidable Fixed overhead will be incurred irrespective of plant closure or not
7	Irrelivant-Research expenditure is Sunk Costs
8	Irrelivant-The Advertsising costs shall not change if Product A is selected over Product B or vice versa
9	Irrelivant-It is a Sunk Costs