Decision Making and Relevant Information

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CHAPTER 11
DECISION MAKING AND RELEVANT INFORMATION

11-16(20 min.)Disposal of assets.

1.This is an unfortunate situation, yet the $75,000 costs are irrelevant regarding the decision to remachine or scrap. The only relevant factors are the future revenues and future costs. By ignoring the accumulated costs and deciding on the basis of expected future costs, operating income will be maximized (or losses minimized). The difference in favor of remachining is $2,000:

(a)(b)
RemachineScrap
Future revenues$30,000$3,000
Deduct future costs 25,000
Operating income$ 5,000$3,000
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Difference in favor of remachining $2,000

2.This, too, is an unfortunate situation. But the $100,000 original cost is irrelevant to this decision. The difference in relevant costs in favor of rebuilding is $5,000 as follows:

(a)(b)

ReplaceRebuild 

New truck $105,000
Deduct current disposal
price of existing truck 15,000
Rebuild existing truck$85,000
$ 90,000$85,000

Difference in favor of rebuilding $5,000

Note, here, that the current disposal price of $15,000 is relevant, but the original cost (or book value, if the truck were not brand new) is irrelevant.

11-17(20 min.) Relevant and irrelevant costs.

1.
| |Make |Buy | |Relevant costs | | | | Variable costs |$180 | | | Avoidable fixed costs | 20 | | | Purchase price |____ |$210 | | Unit relevant cost |$200 |$210 |

Dalton Computers should reject Peach’s offer. The $30 of fixed costs are irrelevant because they will be incurred regardless of this decision. When comparing relevant costs between the choices, Peach’s offer price is higher than the cost to continue to produce.

2.
| |Keep |Replace |Difference | |Cash operating costs (4 years) |$80,000 |$48,000 |$32,000 | |Current disposal value of old machine | | (2,500) | 2,500 | |Cost of new machine |______ | 8,000 | (8,000) | |Total relevant costs |$80,000 |$53,500 |$26,500 |

AP Manufacturing should replace the old machine. The cost savings are far greater than the cost to purchase the new machine.

11-18(15 min.) Multiple choice.

1. (b)Special order price per unit$6.00
Variable manufacturing cost per unit 4.50
Contribution margin per unit$1.50

Effect on operating income= $1.50 ( 20,000 units
= $30,000 increase

2. (b)Costs of purchases, 20,000 units ( $60 $1,200,000
Total relevant costs of making:
Variable manufacturing costs, $64 – $16$48
Fixed costs eliminated 9
Costs saved by not making$57
Multiply by 20,000 units, so total
costs saved are $57 ( 20,000 1,140,000
Extra costs of purchasing outside 60,000
Minimum overall savings for Reno 25,000
Necessary relevant costs that would have
to be saved in manufacturing Part No. 575$ 85,000

11-19(30 min.) Special order, activity-based costing.

1.Award Plus’ operating income under the alternatives of accepting/rejecting the special order are:

| |Without One-Time Only |With One-Time Only | | | |Special Order |Special Order | | |...
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