Decision-Making and Relevant Costs
Explain a situation you have observed (or read about) in which a firm made a decision considering irrelevant costs or did not consider relevant costs. What was the outcome of the decision, and what could have been done differently?
One situation I’ve come across involves a manufacturing firm that decided to continue producing a particular product line despite declining sales and profitability. The decision was based on historical attachment to the product and the sunk costs invested in its production facilities. The firm did not adequately consider the relevant costs associated with continuing production versus discontinuing the product line.
Outcome of the Decision:
- The firm incurred ongoing losses as sales continued to decline, leading to excess inventory buildup and increased storage costs.
- Resources that could have been allocated to more profitable product lines were tied up in maintaining the struggling product line.
- Overall profitability of the firm was negatively impacted due to the persistence of unprofitable operations…
One situation I’ve come across involves a manufacturing firm that decided to continue producing a particular product line despite declining sales and profitability. The decision was based on historical attachment to the product and the sunk costs invested in its production facilities. The firm did not adequately consider the relevant costs associated with continuing production versus discontinuing the product line.
Outcome of the Decision:
- The firm incurred ongoing losses as sales continued to decline, leading to excess inventory buildup and increased storage costs.
- Resources that could have been allocated to more profitable product lines were tied up in maintaining the struggling product line.
- Overall profitability of the firm was negatively impacted due to the persistence of unprofitable operations…
One situation I’ve come across involves a manufacturing firm that decided to continue producing a particular product line despite declining sales and profitability. The decision was based on historical attachment to the product and the sunk costs invested in its production facilities. The firm did not adequately consider the relevant costs associated with continuing production versus discontinuing the product line.
Outcome of the Decision:
- The firm incurred ongoing losses as sales continued to decline, leading to excess inventory buildup and increased storage costs. Decision-Making and Relevant Costs
- Resources that could have been allocated to more profitable product lines were tied up in maintaining the struggling product line.
- Overall profitability of the firm was negatively impacted due to the persistence of unprofitable operations…
