Chapter 25, Problem E25.20E

To determine

Concept Introduction:

Relevant or avoidable costs and Irrelevant or unavoidable costs –

The major decisions that a business has to take during its operations include dropping of a product, elimination of a segment, buy or make a product, to sell at scrap or rework on the product, to accept special offers etc. All these decisions are taken on the basis of the costs involved. There are two types of costs –

1. Relevant costs or avoidable costs – these costs can be defined as the costs that can be avoided if we choose over option over the other. Example of relevant costs are, direct material, direct labor, avoidable fixed costs etc.

2. Irrelevant costs – these costs can be defined as the costs that cannot be avoided in any of the options available or the costs which have been already incurred like sunk costs. Examples of irrelevant costs are unavoidable fixed costs, or the costs which have been already incurred.

To explain:

Should Naturalplus continue to sell only the gallon-size plain yogurt (sell as it is) or covert the plain yogurt into individual-size portions of fruited yogurt (process further)