Question

Every month, Clara’s Coffee incurs total costs of $50,000 to brew several thousand gallons of coffee. The firm can then spend $28,000 to bottle the coffee as is, or it can spend $45,000 to sweeten the coffee and then bottle it. Clara has just learned that the total costs of brewing will rise to $60,000 in the month ahead. Given this information, which of the following statements is accurate?

• A  : This change in brewing costs is a relevant cost that must be included in an incremental analysis.

  B  : We cannot determine what effect this change in brewing costs will have on the firm’s net income for either type of coffee.
• C  : This change in brewing costs is a sunk cost that is relevant to an incremental analysis.

• D  : This change in brewing costs is irrelevant to an incremental analysis since it is a joint cost.

Answer 1

Answer choice: D This change in brewing costs is irrelevant to an incremental analysis since it is a joint cost.

Explanation :The joint cost refers to that cost which is incurred before the split-off point on the production or manufacturing of multiple products, by consuming the same inputs or factors of production.

Since brewing cost increase is not Relevent to decide which type of coffee to produce. As the same has to be incurred.

A sunk cost refers to money that has already been spent and which cannot be recovered. So incremental brewing cost is not a sunk cost.