Question

For the past five years, the RS Company has produced and sold electronic magnets to chemistry labs throughout the United States. Recently, a strong competitor has entered the market and RS is considering whether it should continue to produce and sell the electronic magnets. The following information has been gathered to assist management in its decision:
A) The machinery used to produce the magnet was purchased five-years ago for $500,000.
B) Four of the employees who produce magnets would be reassigned to the magnifying glass division.
C) The space now used to produce the magnets would be used to eliminate the need to rent warehouse space.
D) Sales volume (units) is estimated to drop by 50% once the competitor becomes fully operational.

Which of the items listed above is (are) relevant to the decision to continue the production and sale of the electronic magnets?

Answer 1

Answer:

Explanation:

For a cost to be relevant it has to be futuristic and not past

A relevant cost can be said to be a cost or costs that will be incurred as a result of a particular make or buy decision, and which will change in the future as a result of that decision.

A) The machinery used to produce the magnet was purchased five-years ago for $500,000.

IRRELEVANT

A relevant cost is a cost or costs that will be incurred as a result of the decision, and which will change in the future as a result of that decision. In this case, the machine has already been bought.

B) Four of the employees who produce magnets would be reassigned to the magnifying glass division.

RELEVANT

A relevant cost is a cost or costs that will be incurred as a result of the decision, and which will change in the future as a result of that decision. In this case, the employees will be reassigned which implies that the cost of their salaries will be a cost to be borne when they employ new hands.

C) The space now used to produce the magnets would be used to eliminate the need to rent warehouse space.

RELEVANT

A relevant cost is a cost or costs that will be incurred as a result of the decision, and which will change in the future as a result of that decision. In this case, the space will be reassigned which implies that the cost of their rent will be a cost not to be saved.

D) Sales volume (units) is estimated to drop by 50% once the competitor becomes fully operational.

RELEVANT

A relevant cost is a cost or costs that will be incurred as a result of the decision, and which will change in the future as a result of that decision. In this case, the revenue will be reduced by 50% which implies that the inflow of sales will be half the original amount going forward. This is futuristic and hence relevant