Chapter 25, Problem P25.27BPGB

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.

Requirement 1

To identity:

Each cost in the income statement as either relevant or irrelevant to Summer Fun’s decision.

To determine

Requirement 2

To prepare:

A differential analysis to determine whether Summer Fun should accept this special sales order or not

To determine

Requirement 3

To identity:

Long-term factors to be considered in deciding whether to accept the special sales order or not.