Stephenson Company is trying to decide which one of two contracts it will accept. The costs and revenues associated with each are listed below: The equipment was purchased last year and has no resale value. Which of these amounts is relevant for the selection of one contract over another?

Question

Stephenson Company is trying to decide which one of two contracts it will accept. The costs and revenues associated with each are listed below:  The equipment was purchased last year and has no resale value. Which of these amounts is relevant for the selection of one contract over another?

Quizplus · Accepted Answer

Since the contract revenue differs among the alternatives, it is a differential revenue. Since the labor cost differs among the alternatives, it is a differential cost. The following are not relevant to this decision for the reasons stated. The materials and cost incurred for consulting advice do not differ among the alternatives. The book value of the asset and associated depreciation is based on a sunk cost that cannot be avoided because it has already been incurred and therefore is not relevant to current decisions. There is no indication that the allocated portion of the overhead can be avoided.

Stephenson Company Is Trying to Decide Which One of Two