Your Brother\'s Corporation is considering two alternatives that are code-named

Question

Your Brother's Corporation is considering two alternatives that are code-named S and T. Costs associated with the alternatives are listed below. He has asked for your help in deciding which alternative to choose. Alternative S Alternative T Material costs.. Labor cost.. Utility costs. Quality Control costs 48,000 $40,000 $ 57,000 $15,000 63,000 $40,000 46,000 $15,000 After consideration of the alternatives, answer the two questions: a. After consideration of the two alternatives, please identify the costs that are relevant AND thee costs which are not relevant in the choice. (1/2 pt each) b. Calculate the differential cost between the two alternatives. (Show your calculations) (1 pt)

Explanation / Answer

Part A

Relevant cost are that cost that change with each alternative and irrelevant cost doesn't change with the alternative such as rent, insurance etc.

Material and utilitiy cost are relevant as change with alternative. And labour and quality control are not relevant as remains same in both alternative.

Part B

Differential cost is the difference between the cost of two alternative decisions or a change in output levels. This concept is used when there are multiple possible options to pursue and choice must be made to select one option and drop the others. So here differential cost between alternative S and T is

S (48000+57000)=$105000

T (63000+46000)=$ 109000

Differential cost is $4000

As alternative S incurs less cost so it should be chosen.

Labour and quality control cost are not considered in differential cost because these are same in both alternative.

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