The focus of business decision making is to identify \"relevant\" items - those
ID: 2472025 • Letter: T
Question
The focus of business decision making is to identify "relevant" items - those where future costs and revenues are expected to differ between alternatives under consideration. Examine the following listing, and apply your best judgment to identify if the item is "relevant." Relevant Irrelevant The cost of a prior paint job, in a decision to repaint a building. The original investment cost in shares of stock in a company that is in decline, in a decision to sell or hold. Income taxes that can be saved by selling an asset at a loss, in a decision to sell or hold. The cost of tearing out an old parking lot, in deciding whether or not to build a new lot. The cost of textbooks, in deciding which classes to take during a semester. The original cost of a textbook, in deciding whether or not to resell the book at the end of the term. The cost of an attorney, in deciding whether to appeal a traffic fine that is undeserved. The allocation of factory depreciation, in deciding whether to accept a special offer from a customer. Research and development costs incurred to develop a new product, in deciding whether to file for a patent application. Proceeds that will be received from the sale of "factory seconds," in deciding how to price a primary product. The focus of business decision making is to identify "relevant" items - those where future costs and revenues are expected to differ between alternatives under consideration. Examine the following listing, and apply your best judgment to identify if the item is "relevant." Relevant Irrelevant The cost of a prior paint job, in a decision to repaint a building. The original investment cost in shares of stock in a company that is in decline, in a decision to sell or hold. Income taxes that can be saved by selling an asset at a loss, in a decision to sell or hold. The cost of tearing out an old parking lot, in deciding whether or not to build a new lot. The cost of textbooks, in deciding which classes to take during a semester. The original cost of a textbook, in deciding whether or not to resell the book at the end of the term. The cost of an attorney, in deciding whether to appeal a traffic fine that is undeserved. The allocation of factory depreciation, in deciding whether to accept a special offer from a customer. Research and development costs incurred to develop a new product, in deciding whether to file for a patent application. Proceeds that will be received from the sale of "factory seconds," in deciding how to price a primary product.Explanation / Answer
The cost of a prior paint job, in a decision to repaint a building. Yes As it is a sunk cost The original investment cost in shares of stock in a company that is in decline, in a decision to sell or hold. Yes As it the relevant cost which will help us in deciding it to sell or not. So cost of original investment will help us in knowin g the loss which we can have from the sale of shares Income taxes that can be saved by selling an asset at a loss, in a decision to sell or hold. Yes As income tax saving reduces the loss amount which inturn increase the net realizable value The cost of tearing out an old parking lot, in deciding whether or not to build a new lot. Yes Out of pocket cost as it is incurred for removal of parking lot and making new parking lot so relevant. If this tearing is normal depreciation than it is a sunk cost and hence irrelevant The cost of textbooks, in deciding which classes to take during a semester. Yes As as classes will be taken so cost of the textbook is one of the cost associated (out of pocket cost)with it The original cost of a textbook, in deciding whether or not to resell the book at the end of the term. Yes As at the end of the term the book will be of no use so it is better to sale than keep it, so book cost (sunk cost) is not relevant The cost of an attorney, in deciding whether to appeal a traffic fine that is undeserved. Yes As if the cost of attorney(out of pocket cost) is more or equal to fine than it makes no sense to raise an appeal The allocation of factory depreciation, in deciding whether to accept a special offer from a customer. Yes Because it is fixed cost it will be incurred irrespective of special offer accepted or not Research and development costs incurred to develop a new product, in deciding whether to file for a patent application. Yes This is a sunk cost as it has already been incurred Proceeds that will be received from the sale of "factory seconds," in deciding how to price a primary product. Yes It is reduced from the price of primary product so it is relevant