When a firm has the opportunity to add a project that will utilize excess factory capacity (that is currently not being used), which costs should be used to help determine if the added project should be undertaken?
A)Allocated overhead costs
B)Sunk costs
C)Incremental costs
D)Average costs

Question

Quizplus · Accepted Answer

Only incremental costs should be used to help determine if the added project should be undertaken. Sunk costs are irrelevant to this decision because they are costs that have already been incurred and cannot be recovered. Allocated overhead costs and average costs may also be misleading because they may not accurately reflect the actual costs of the new project. Incremental costs, on the other hand, reflect the additional costs that will be incurred as a result of adding the new project and are therefore the most relevant costs to consider.

When a Firm Has the Opportunity to Add a Project