Question

Required information Knowledge Check 01 Which of the following factors should be considered when deciding whether to keep a product line or drop it? (Select all that apply) Check All That Apply Opportunity costs of using the production facity currently being used for the productie Revenues generated by the productie ✓ W e costs incurred in manufacturing the product Dreat Dec costs associate Pro common come to our Research Socc er

Answer 1

Answer to first question in the list: a) Opportunity cost of using the production facility currently being used for the product line; b) Revenues generated by the product line; c) Variable costs incurred in manufacturing the product; d) Direct fixed costs associated with the product line. Reason: Options-(a) thru (d) are the relevant costs while deciding whether to drop a product line because: Opportunity costs refer to value of opportunities forgone by the firm by continuing with alternate course of action. That is, if a firm drops a particular product line, facilities utilized to produce such product line can be freed up and let out for a rent. While deciding whether to continue or drop a product line, this opportunity cost shall be considered in the evaluation process. Fixed costs are those costs which would remain the same in total irrespective of level of production or sales. It is a committed cost to be incurred by the firm whether it carries out operations or not. Therefore, avoidable fixed costs are relevant costs for decision making with respect to continue or drop a product line.

Variable costs are those costs which would remain the same per unit irrespective of level of production or sales. It is an unit cost to be incurred by the firm only when the firm carries out its business operation. Therefore, variable costs are the relevant costs for any decision making with respect to continue or drop a product line. Option-(e): Common fixed costs allocated to product line is irrelevant while deciding whether to drop a a product line because: Indirect costs (Mfg. overhead costs) are those product costs that are not directly attributable to products manufactured but are common costs incurred in the factory. These costs are unavoidable costs. For instance: Factory insurance, Indirect materials, Indirect labor, Factory utilities, etc. are commonly incurred and will be allocated to product lines using suitable base identified and quantified for this purpose.