Chapter 12, Problem 1SEQ

Mario Company is considering discontinuing a product. The costs of the product consist of $20,000 fixed costs and $15,000 variable costs. The variable operating expenses related to the product total $4,000. What is the differential cost?
A. $19,000
B. $15,000
C. $35,000
D. $39,000

To determine

Concept Introduction:

Decision making plays an important role in the management. The decisions taken by managers are called managerial decisions. Managerial Decisions are decisions taken by managers for the operations of a firm. These decisions include setting target growth rates, hiring or firing employees, and deciding what products to sell. Manager's decisions are taken on the basis of quantitative as well as the qualitative measures. The managerial decision includes the decisions like make or buy, accept or reject new offers, sell or further process etc. These decisions are taken on the basis of relevant costs.

Relevant costs are the costs that are relevant for any decision making. Relevant costs are helpful for take managerial decisions like make or buy, accept or reject new offers, sell or further process etc.

Two basic types of the relevant costs are as follows:

1. Out-of-pocket costs
2. Opportunity costs

To Calculate:

The Differential Cost

Answer to Problem 1SEQ

The Differential Cost is $19,000

Explanation of Solution

The Differential Cost is calculated as follows:

Variable Product costs $15,000

Variable operating expenses $4,000

Total Differential cost = $19,000