Should Decision Makers Focus Only On The Relevant Costs For Decision Making?
3-9 Why should decision makers focus only on the relevant costs for decision making? This is because a relevant cost or benefit is a cost or benefit that differs between alternatives. Differential costs are also known as relevant costs. Any cost or benefit that does not differ between alternatives is irrelevant and can be ignored in a decision. This is an extremely powerful concept that allows us to ignore piles of data when making decisions, since most things are not affected by any given decision.
3-12: Are fixed costs always irrelevant?
No, fixed costs are not always irrelevant. This is because not all fixed costs are sunk costs, sometimes they can become relevant. An example of a fixed cost is a monthly salary. If there is a Christmas sale and hours of operation are extended, the employee will now receive overtime pay. This additional cost is still fixed but now relevant.
3-49: Cost Classification and Target Profit: Make appropriate assumptions about cost behavior and assume that direct labor costs vary directly with the number of units produced. How many units must the company sell in order to earn a pre-tax profit of $500,000?
The following items are variable costs:
Carpenter labor to make shelves: $600,000 Wood to make the shelves: $450,000
Sales commissions based on number of units sold: $180,000
Miscellaneous variable manufacturing overhead (support): $ 350,000
Total variable costs would equal $1,580,000…