Question

When evaluating special orders, how should a company treat unavoidable fixed costs?

A
They should be ignored.
B
They should be added to the potential direct costs.
C
They should be included in the cost of the special order.
D
They should be subtracted from the potential net profit.

Answer 1

For special orders, a company should disregard unavoidable fixed costs as they are considered sunk costs, and instead focus on variable costs which are relevant to the decision-making process.

Step-by-step explanation:

When evaluating special orders, a company should treat unavoidable fixed costs as sunk costs that have already been incurred and cannot be altered. Therefore, the correct approach is to ignore sunk costs, which includes these unavoidable fixed costs, in the decision-making process for future production or pricing. Instead, a focus should be on variable costs, which can be influenced by production decisions and show diminishing marginal returns as production increases.