Relevant Cost

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CHAPTER 13
SHORT-RUN DECISION MAKING:
RELEVaNT COSTING

1 DISCUSSION QUESTIONS

1.Tactical decisions are short run in nature; they involve choosing among alternatives with an immediate or limited end in view. Strategic decisions involve selecting strategies that yield a long-term competitive advantage.

2.Depreciation is an allocation of a sunk cost. This cost is a past cost and will never differ across alternatives.

3.The salary of the supervisor of an assembly line with excess capacity is an example of an irrelevant future cost for an accept-or-reject decision.

4.Past costs can be used to help predict future costs.

5.Yes. Suppose, for example, that sufficient materials are on hand for producing a part for two years. After two years, the part will be replaced by a newly engineered part. If there is no alternative use for the materials, then the cost of the materials is a sunk cost and not relevant in a make-or-buy decision.

6.A complementary effect is the loss of revenue on a secondary product when the primary product is dropped. Thus, complementary effects may make it more expensive to drop a product.

7.A manager can identify alternatives by using his or her own knowledge and experience and by obtaining input from others who are familiar with the problem.

8.No. Joint costs are irrelevant. They occur regardless of whether the product is sold at the split-off point or processed further.

9.Yes. The incremental revenue is $1,400, and the incremental cost is only $1,000, creating a net benefit of $400.

10.No. If a scarce resource is used in producing the two products, then the product providing the greatest contribution per unit of scarce resource should be selected. For more than one scarce resource, linear programming may be used to select the optimal mix.

11.If a firm is operating below capacity, then a price that is above variable costs will increase profits.

2 MULTIPLE-CHOICE EXERCISES

13–1e

13–2d

13–3e

13–4c

13–5a

13–6c

13–7c

13–8c

13–9c

13–10c

13–11a

13–12d

3 CORNERSTONE EXERCISES

Cornerstone Exercise 13–13

1.There are two alternatives: make the ingredient in-house or purchase it externally.

2.Relevant costs of making the ingredient in-house include direct materials, direct labor, and variable overhead (both manufacturing and marketing in nature). Relevant costs of purchasing the ingredient externally include the purchase price.

3.AlternativesDifferential
MakeBuyCost to Make

Direct materials$25,000$25,000
Direct labor15,00015,000
Variable manufacturing overhead7,5007,500
Variable marketing overhead10,00010,000
Purchase cost$60,000(60,000)
Total relevant cost$57,500$60,000$(2,500)

It is cheaper to make the ingredient in-house. This alternative is cheaper by $2,500.

4.AlternativesDifferential
MakeBuyCost to Make

Direct materials$25,000$25,000
Direct labor15,00015,000
Variable manufacturing overhead7,5007,500
Variable marketing overhead10,00010,000
Avoidable fixed plant overhead12,000a12,000
Purchase cost$60,000(60,000)
Total relevant cost$69,500$60,000$9,500

Now it is cheaper to purchase the ingredient. This alternative is cheaper by $9,500.

a$12,000 = $30,000 × 0.40

Cornerstone Exercise 13–14

1. costs and benefits of accepting the special order include the sales price of $4, direct materials, direct labor, and variable overhead. No relevant costs or benefits are attached to rejecting the order.

2.If the problem is analyzed on a unit basis:

Differential
Benefit to
AcceptRejectAccept
Price$4.00$$4.00
Direct materials(1.50)(1.50)
Direct labor(2.00)(2.00)
Variable overhead(1.00)(1.00)
Decrease in...
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