Calgary Corporation is closing one of its divisions. Operating data on this division follows: $$\begin{array} { l r }
\text { Sales } & \$ 80,000 \
\text { Variable costs } & 40,000 \
\text { Overhead } & 40,000
\end{array}$$ Overhead consists of $30,000 in salary and $10,000 for rent and insurance. The salary is for the chief engineer, who will continue to work for Calgary even if the division is closed.
Rent and insurance that will cease if the division is closed is an:
A) Unavoidable and irrelevant cost
B) Unavoidable and relevant cost
C) Avoidable and irrelevant cost
D) Avoidable and relevant cost

Question

Calgary Corporation is closing one of its divisions. Operating data on this division follows: $$\begin{array} { l r } 
\text { Sales } & \$ 80,000 \
\text { Variable costs } & 40,000 \
\text { Overhead } & 40,000
\end{array}$$ Overhead consists of $30,000 in salary and $10,000 for rent and insurance. The salary is for the chief engineer, who will continue to work for Calgary even if the division is closed.
Rent and insurance that will cease if the division is closed is an:
A) Unavoidable and irrelevant cost
B) Unavoidable and relevant cost
C) Avoidable and irrelevant cost
D) Avoidable and relevant cost

Quizplus · Accepted Answer

Rent and insurance costs that will cease if the division is closed are avoidable costs because they can be eliminated if the decision is made to close the division. These costs are also relevant to the decision-making process because they will affect the company's finances if the division is closed.

Calgary Corporation Is Closing One of Its Divisions Sales $80,000 Variable costs 40,000 Overhead 40,000\begin{array} { l r } \text { Sales } & \$ 80,000 \\\text { Variable costs } & 40,000 \\\text { Overhead } & 40,000\end{array} Sales Variable costs Overhead ​$80,00040,00040,000​

Calgary Corporation Is Closing One of Its Divisions $\begin{array} { l r } \text { Sales } & \$ 80,000 \\\text { Variable costs } & 40,000 \\\text { Overhead } & 40,000\end{array}$