La Jolla Beverage Products is considering producing a wine cooler that would be a blend of a white wine, a rose wine, and fruit juice. To meet taste specifications, the wine cooler must consist of at least 50% white wine, at least 20% and no more than 30% rose, and exactly 20% fruit juice. La Jolla purchases the wine from local wineries and the fruit juice from a processing plant in San Francisco. For the current production period, 9000 gallons of white wine and 7500 gallons of rose wine can be purchased; an unlimited amount of fruit juice can be ordered. The costs for the wine are $1 per gallon for the white and $1.5 per gallon for the rose; the fruit juice can be purchased for $0.5 per gallon. La Jolla Beverage Products can sell all of the wine cooler it can produce for $3 per gallon. Is the cost of the wine and fruit juice a sunk cost or a relevant cost in this situation?

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Business

Emanuel Wheeler

4 May, 14:01

La Jolla Beverage Products is considering producing a wine cooler that would be a blend of a white wine, a rose wine, and fruit juice. To meet taste specifications, the wine cooler must consist of at least 50% white wine, at least 20% and no more than 30% rose, and exactly 20% fruit juice. La Jolla purchases the wine from local wineries and the fruit juice from a processing plant in San Francisco. For the current production period, 9000 gallons of white wine and 7500 gallons of rose wine can be purchased; an unlimited amount of fruit juice can be ordered. The costs for the wine are $1 per gallon for the white and $1.5 per gallon for the rose; the fruit juice can be purchased for $0.5 per gallon. La Jolla Beverage Products can sell all of the wine cooler it can produce for $3 per gallon. Is the cost of the wine and fruit juice a sunk cost or a relevant cost in this situation?

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Mia Keith · Answer 1

Answer: A relevant cost are those that differ in total between the options are relevant to a decision. If a cost will be the same regardless of the option selected, the decision has no effect on the cost and can be ignored.

The cost of wine and fruit juice is a relevant cost because it is subject to a future decision on the mixing percentages that La Jolla will choose and will be incremental because the more they want to produce, the more the cost will increase.