Question

In regards to deciding whether a product line or business segment should be added or dropped, which of the following is correct?

a) A product or segment whose revenue do not cover its variable and traceable fixed costs should usually be dropped.

b) Fixed costs are irrelevant in decisions about whether a product or segment should be dropped.

c) A product or segment should be charged for rent in proportion to the space it occupies even if the space has no alternative use and the rental payment is unavoidable in deciding whether to drop the product or segment.

d) The variable costs of a product or segment are not necessarily relevant in a decision considering whether to eliminate it.

Answer 1

Answer

b) Fixed costs are irrelevant in decisions about whether a product or segment should be dropped.

A Fixed cost is a cost that cannot be recovered or changed and is independent of any future costs a business may incur. Since decision-making only affects the future course of business, Fixed costs should be irrelevant in the decision-making process. Instead, decision-makers should base strategies on how to proceed with business or investment activities on future costs.

Rational thinking dictates that we should ignore Fixed costs when making a decision. The goal of a decision is to alter the course of the future. And since Fixed costs cannot be changed, you should avoid taking those costs into account when deciding how to proceed.