Occidental Company is studying whether to drop a product because of ongoing losses. Costs that would be relevant in this situation would include variable manufacturing costs as well as:

Question

BlackTom AI · Accepted Answer

Relevant (differential) costs are those that will change depending on the decision. If Occidental drops a product, the costs that matter are those that would be saved (i.e., eliminated) when the product is discontinued. Variable manufacturing costs clearly change with production and are relevant; among fixed costs, only those that are avoidable (can be eliminated if the product is dropped) are relevant.

Step-by-step reasoning:
1. Classify costs by behavior and traceability:
   - Variable costs: change with output → relevant.
   - Fixed costs: some are traceable/avoidable to a product; others are common/unavoidable.
   - Allocated costs: apportionments of corporate overhead that don’t necessarily disappear if a product is dropped.
   - Sunk costs (e.g., past depreciation expense) are irrelevant.
2. Determine which fixed costs would be eliminated by dropping the product:
   - Avoidable fixed costs (for example, a product-specific supervisor’s salary, a lease on equipment used only for that product, or maintenance tied solely to that product) would be saved → relevant.
   - Unavoidable fixed costs (e.g., long-term corporate overhead that persists regardless of the product) would not be saved → irrelevant.
3. Apply these definitions to the answer choices:
   - Factory depreciation: typically a sunk or allocated fixed cost that will continue or be allocated elsewhere → not relevant.
   - Unavoidable fixed costs: by definition not saved if product dropped → not relevant.
   - Avoidable fixed costs: will be eliminated if product is discontinued → relevant.
   - Allocated corporate administrative costs and general corporate advertising: usually common costs that remain after dropping one product (allocated across products) → not relevant.
   - The combined option (allocated admin AND advertising) is therefore incorrect.

Why the correct answer is correct:
Avoidable fixed costs are the only fixed-cost category that will change as a direct result of the decision to drop the product, so they must be included with variable manufacturing costs when evaluating whether to discontinue the product.

Conclusion: The correct choice is Avoidable fixed costs, which matches the provided answer.

Occidental Company is studying whether to drop a product because of ongoing losses. Costs that would be relevant in this situation would include variable manufacturing costs as well as:Single choice

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