Question

In a sell or process further decision, consider the following costs: A variable production cost incurred prior to split-off. A variable production cost incurred after split-off. An avoidable fixed production cost incurred after split-off. Which of the above costs is (are) not relevant in a decision regarding whether the product should be processed further?

Answer 1

Answer:

The only cost which is not relevant is: "A variable production cost incurred prior to split-off."

Explanation:

To decide whether a firm should further process or sell a product at a certain production point, the firm should consider about the additional revenue they get from further process and the additional cost the further production consumes in comparison to selling the product without further processing. If the marginal revenue is above the additional cost, further production decision will be made.

That is the reason why the variable production cost incurred before the split-off is sunk cost ( i.e whether the decision is to sell of to further process, the cost has already consumed) which make it irrelevant in the decision making regarding to sell or further process.