10.P2.308

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  • #218714
    Udayan Mukherjee
    Participant

    Sir,
    In said question II is asked to calculate “ Net cash flow”.

    Why have we deducted fixed cost for calculation of Net cash Flow. Are Fixed cost not sunk / irrelevant cost.

    Please clarify. Regards Udayan

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  • #218715
    Lynn Roden
    HOCK international

    Hi Udayan Mukherjee,

    The costs given in this problem are costs that are related to a new product. The fixed cost is a cost that would not be incurred if Webster does not produce that new product. Since it would not be incurred if the new product is not produced, it is a relevant cost and should be included in the calculation of net operating cash flow for the new product.

    If the problem said that the fixed cost was a cost that would be incurred whether or not the new product was produced, it would not be relevant and would be excluded.

    Lynn

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