Which of the following constitutes an example of a cost which is not incremental, and therefore not relevant in an accept/reject decision?
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A. B. C. D. E.B
These are examples of opportunity costs, externalities or installation costs and are all incremental cash flows.
In an accept/reject decision, relevant costs are the costs that should be considered when evaluating whether to accept or reject a particular project or investment opportunity. These costs are typically incremental, meaning they represent the additional costs or benefits that will be incurred or gained as a result of accepting the project.
Let's analyze each answer choice to determine which one constitutes an example of a cost that is not incremental and therefore not relevant in an accept/reject decision:
A. A firm has a parcel of land that can be used for a new plant site or, alternatively, can be used to grow watermelons. In this scenario, the cost of the land is relevant because it represents the cost that will be incurred if the firm decides to use the land for the new plant site. Therefore, this option does not constitute an example of a cost that is not incremental and not relevant.
B. All of these are examples of incremental cash flows, and therefore, relevant cash flows. This answer choice states that all the examples provided are incremental cash flows, which means they are relevant in the accept/reject decision. Therefore, this option does not constitute an example of a cost that is not incremental and not relevant.
C. A firm orders and receives a piece of new equipment, which is shipped across the country and requires $25,000 in installation and set-up costs. The cost of the equipment, as well as the installation and set-up costs, are relevant because they represent the additional costs that will be incurred if the firm decides to accept the project requiring the equipment. Therefore, this option does not constitute an example of a cost that is not incremental and not relevant.
D. A firm can produce a new cleaning product that will generate new sales, but some of the new sales will be from customers who switch from another product the company currently produces. In this scenario, the sales generated from customers who switch from another product are not incremental. These sales would likely occur regardless of whether the firm accepts the new cleaning product project or not. Therefore, this option constitutes an example of a cost that is not incremental and not relevant in an accept/reject decision.
E. All of these are not examples of incremental cash flows. This answer choice states that all the examples provided are not incremental cash flows, which means they are not relevant in the accept/reject decision. Therefore, this option constitutes an example of a cost that is not incremental and not relevant.
To summarize, the correct answer is D. A firm can produce a new cleaning product that will generate new sales, but some of the new sales will be from customers who switch from another product the company currently produces. This option constitutes an example of a cost that is not incremental and not relevant in an accept/reject decision.