Question

A company is considering replacing its existing computer system with a new computer system. The new system can offer considerable savings in computer processing and inventory management costs. Information about the existing system and the new system follow:

	Existing Computer	New Computer
Original cost	$10,000	$15,000
Annual operating cost	$ 3,500	$ 2,000
Accumulated depreciation	$ 6,000	―
Current salvage value of the existing system	$ 4,000	―
Remaining life in 5 years	5 years
Salvage value in 5 years	$ 0	$ 0
Annual depreciation	$ 2,000	$ 3,000

Which of the following is an avoidable cost if a company gives up making a product?

Select one:

a. All the variable costs associated with making that product

b. The cost of the supervisor who will be laid off as a result of discontinuing the product

c. The costs of the machinery that can be sold when the product is discontinued

d. All of the above

Answer 1

Avoidable cost refers to those cost which can be prevented .

In the above case , if the entire production is stopped then they will have to incur only fixed expenses such as rent of premises .

All the variable cost (cost which can varies with the volume of production . For example raw material cost) can be avoided as it is incurred only when production takes place.

There will be no supervision cost as the supervisor is laid off.

And also the cost of machinery that can be sold if the product is discounted can be avoided .

Thus answer : All of the above .