Question

Eagle Corp. currently sells 28,000 motor homes per year at $84,000 each and 7,000 luxury motor coaches per year at $135,000 each. The company wants to introduce a new portable camper to fill out its product line; it hopes to sell 29,000 of these campers per year at $24,700 each. An independent consultant has determined that if the company introduces the new campers, it could boost the sales of its existing motor homes by 2,500 units per year and reduce the sales of its motor coaches by 750 units per year.

Which of the following statements are true with respect to the new camper project?

1) The number of current motors homes sold is a relevant cost.

2) The reduction of 750 motor coaches if the project is undertaken is a relevant cost.

Answer 1

Answer)

Relevant cost means the cost to be incurred due to acceptance of a special order or when a particular business decision is undertaken. It is cost that influences the decision of a decision maker. Relevant cost has following characteristics:

· It should be a future cost (i.e. cost to be incurred).

· It should be different under each alternative course of action.

Relevant cost means cost to be incurred due to selection of a particular business decision plus benefit to be lost due to selection of a particular business decision.

1) The number of current motors homes sold is a relevant cost in respect to the new camper project: This statement is INCORRECT. It is because the future cost of 29,000 units of campers is not affected by current cost 28,000 motor homes manufactured and sold.

2) The reduction of 750 motor coaches if the project is undertaken is a relevant cost in respect to the new camper project: This statement is CORRECT. It is because if 29,000 campers are manufactured, there will be reduction of manufacture and sale of 750 motor coaches. Accordingly, the loss of contribution margin consequent upon reduction of sales of 750 motor coaches, will be opportunity cost in respect of the new camper project and is thus a relevant cost.