A factory is operating at less than 100% capacity. Potential additional business will not use up the remainder of the plant capacity. Given the following list of costs, which one should be ignored in a decision to produce additional units of product?
A) Variable selling expenses
B) Fixed factory overhead
C) Direct labor
D) Contribution margin of additional units

Question

Quizplus · Accepted Answer

Fixed factory overhead should be ignored in a decision to produce additional units of product because it does not change with the level of production. The relevant cost in this situation is the variable cost of producing and selling additional units, which includes direct labor and variable selling expenses, and the contribution margin of the additional units.

A Factory Is Operating at Less Than 100% Capacity