Question

A company has obsolete inventory and is trying to decide whether to trash it or sell it for a reduced cost. Which of the following is (are) relevant to the decision?

	Direct material cost assigned to the inventory	Fixed overhead cost assigned to the inventory
A)	Yes	Yes
B)	Yes	No
C)	No	Yes
D)	No	No

Multiple Choice

• Choice C

• Choice D

• Choice B

• Choice A

Answer 1

Solution 1:

Direct material cost and fixed overhead cost assigned to inventory, both are irrelevant in the decision to sell or throw out obsolete inventory because these costs are already incurred and treated as sunk cost.

Hence choice D is correct.

Solution 2:

A variable production cost incurred prior to split-off is not relevant in a decision regarding whether the product should be processed further.

Hence 2nd option "Only I" is correct.

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