Question

A company is considering the following alternatives:
Revenues: Alternative 1 $240,000 & Alternative 2 $240,000
Variable costs: Alternative 1 $120,000 & Alternative 2 $140,000
Fixed costs: Alternative 1 $70,000 & Alternative 2 $70,000
Required:
1. Which of the following are relevant in choosing between the alternatives?
A) Revenues
B) Variable costs and fixed costs
C) variable costs
D) Fixed costs

Answer 1

Answer:

The answer is C.

Explanation:

Variable cost is a relevant cost. Variable cost varies with the output i.e the total number of units produced. For example in a perfect competitive market, for a firm to be able to operate its revenue/profit must cover variable costs. Also, its revenue is dependent on the number of units produced which is directly proportional to variable cost.

Fixed cost is fixed and it is not a relevant cost in making decision. It is a sunk cost. Whether a business produces or not, fixed cost will be incurred.