Your company currently produces steel and aluminum rims. The board of directors

Question

Your company currently produces steel and aluminum rims. The board of directors wants you to consider the introduction of a new line of rims. Which of the following costs are relevant? Why? Which of the following costs are not relevant? Why?a. Building you already own that will be used for the project, but otherwise will be sold for $650,000, its market value. b. A $250,000 drop in your sales of steel rims if the aluminum woods are introduced. c. $150,000 spent on advertising and marketing last year on rims.

Explanation / Answer

A
RELEVANT
The market value of building is relevant as it represents the opportunity cost of using the building for producing the new line of rims.

B
RELEVANT
The drop in sale on introducing almunium rims is essential as it takes into account the potential drop in revenue, which might threaten the firm's sustainability.

C
IRRELEVANT
This is because on the introduction of new rims, additional advertisement needs to be made. This shall then be redundant.

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