DECISION MAKING AND RELEVANT INFORMATION
Disposal of assets.
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:
Deduct future costs
Difference in favor of remachining
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:
Deduct current disposal
price of existing truck
Rebuild existing truck
Difference in favor of rebuilding
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.
(20 min.) Relevant and irrelevant costs.
| |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.
| |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.
Special order price per unit
Variable manufacturing cost per unit
Contribution margin per unit
Effect on operating income
= $1.50 ( 20,000 units
= $30,000 increase
Costs of purchases, 20,000 units ( $60
Total relevant costs of making:
Variable manufacturing costs, $64 – $16
Fixed costs eliminated
Costs saved by not making
Multiply by 20,000 units, so total
costs saved are $57 ( 20,000
Extra costs of purchasing outside
Minimum overall savings for Reno
Necessary relevant costs that would have
to be saved in manufacturing Part No. 575
(30 min.) Special order, activity-based costing.
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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