Question

How do unavoidable expenses play into the segment elimination decision module?

Answer 1

Unavoidable costs are the costs which cannot be avoided whether the segment continues or is eliminated. These costs are fixed in nature for example – Depreciation on equipment, Salaries of Supervisor, rent, general overheads, etc. For elimination of a segment contribution is compared with avoidable cost. If net benefit of contribution is higher than avoidable cost the segment should continue. Unavoidable costs do not play any role in segment elimination decision module since they remain constant under both alternative and differential impact on analysis is nil. It can also be said that unavoidable cost is irrelevant cost in decision making since they do not affect the decision making process.