The Tangier Company is considering eliminating the following product line: Product AXP Sales $ 44,000 Less variable costs: Raw materials 27,000 Direct labor 6,600 Contribution margin $ 10,400 Less fixed costs: Production costs allocated to products 15,800 Profit (Loss) $ (5,400) What amount of cost is avoidable if Tangier outsources production of this product

Question

Business

Kali Martin

20 October, 23:14

The Tangier Company is considering eliminating the following product line: Product AXP Sales $ 44,000 Less variable costs: Raw materials 27,000 Direct labor 6,600 Contribution margin $ 10,400 Less fixed costs: Production costs allocated to products 15,800 Profit (Loss) $ (5,400) What amount of cost is avoidable if Tangier outsources production of this product

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Quintin Hancock · Answer 1

= $33,600.

Explanation:

Avoidable costs are example of relevant costs. These are costs that are incurred as a direct consequence of taking a decision. All direct costs associated with a decision to produce are avoidable costs, which means such costs will not be incurred should Tangire Company decides not to produce.

Kindly note that items of general fixed costs which are usually allocated are not avoidable. Simply because they would be incurred either way whether or not production takes place.

The avoidable cost of Tangier sums:

Raw material cost + Direct labor cost

= 27,000 + 6,600

= $33,600.