Definition: Unavoidable expenses are costs that will not be eliminated if a department is closed. Unavoidable expenses are also called inescapable expenses for this very reason. They will remain no matter what the company does.
In a down economy, management is often faced with the decision of cutting branches, departments, and even products. In order to save the company money, managers tend to look the departments or products that are losing money or not turning a profit. A lot of times shutting down departments simply because they are losing money is not always a good idea.
In fact, shutting down some non-profitable departments might even cost the company more money. Managers need to take a look at two main expenses when making a decision to close a department: avoidable costs and unavoidable costs.
Avoidable costs are costs that can be eliminated if a department is closed. Salaries are a good example of avoidable costs. When the branch closes, the salaries are stopped as well.
A good example of an unavoidable expense is rent. Think if a business rents a 10,000 square foot building and uses it for three different departments or branches. Each department earns revenue and pays for a third of the rent expense. If one of the branches is closed, the company will still have to pay to rent the entire building. This rental expense isn’t eliminated if the department is closed. In this case, the company might be better off keeping the non-profitable department open because it helps contribute one third of the rental expenses.