Business Degree Certification Practice Test

Which cost is NOT considered avoidable if Dreamland stops producing "Old Softy" pillows?

1. Factory lease

2. Labor costs

3. Raw material costs

4. Supervisory costs

The correct answer is: Factory lease

The factory lease is categorized as a fixed cost, which means it remains constant regardless of the production levels. When a company has committed to a lease, it cannot avoid these costs in the short term simply by stopping production of a specific product like the "Old Softy" pillows. This characteristic differentiates fixed costs, such as lease agreements, from variable costs, which can be adjusted or eliminated based on production decisions. In contrast, labor costs, raw material costs, and supervisory costs are typically variable or semi-variable and can be reduced or eliminated when production ceases. For instance, if production halts, the company can often release or reassign labor, cancel the procurement of raw materials, and adjust supervisory staffing levels accordingly. Thus, these costs are considered avoidable as they directly correlate with the production of goods.