Question

A company is considering dropping a product line. What costs would be relevant to the decision? What costs would be irrelevant? Why? (MO 2)'

Answer 1

Relevant cost : Avoidable cost

Irrelevant cost : Sunk costs and future costs

Step-by-step explanation:

Dropping or retaining a product line by a company depends on the effect of the product line on the net operating income of the company i.e. if the net income is decreased because of a product line then the product line should be dropped and vice versa.

Relevant costs to the dropping of a product line

Avoidable costs is a relevant cost that should be considered when dropping a product line

Irrelevant costs

Sunk costs ( i.e. past operational costs )

and future costs