Chapter 11 - Exercise 11-6(30 minutes 1 Fixed cost per...

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Exercise 11-6  (30 minutes) 1. Fixed cost per mile ($3,500* ÷ 10,000 miles). .. $0.35 Variable operating cost per mile. ......................   0.08     Average cost per mile. ...................................... $0.43 * Depreciation. ............................. $2,000 Insurance. ................................. 960 Garage rent. .............................. 480 Automobile tax and license. ......             60     Total. ......................................... $3,500 2. The variable operating costs would be relevant in this situation. The  depreciation would not be relevant since it relates to a sunk cost.  However, any decrease in the resale value of the car due to its use  would be relevant. The automobile tax and license costs would be  incurred whether Samantha decides to drive her own car or rent a car for  the trip during spring break and are therefore irrelevant. It is unlikely that  her insurance costs would increase as a result of the trip, so they are  irrelevant as well. The garage rent is relevant only if she could avoid  paying part of it if she drives her own car. 3. When figuring the incremental cost of the more expensive car, the  relevant costs would be the purchase price of the new car (net of the  resale value of the old car) and the increases in the fixed costs of  insurance and automobile tax and license. The original purchase price of  the old car is a sunk cost and is therefore irrelevant. The variable  operating costs would be the same and therefore are irrelevant.  (Students are inclined to think that variable costs are always relevant  and fixed costs are always irrelevant in decisions. This requirement  helps to dispel that notion.) Exercise 11-7  (30 minutes) The costs that are relevant in a make-or-buy decision are those costs that  can be avoided as a result of purchasing from the outside. The analysis for  this exercise is:
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Per Unit  Differential  Costs 20,000 Units Make Buy Make Buy Cost of purchasing. ........................ $23.50 $470,000 Cost of making: Direct materials. .......................... $ 4.80 $ 96,000 Direct labor. ................................. 7.00 140,000 Variable manufacturing overhead 3.20 64,000 Fixed manufacturing overhead. ...       4.00     *                         80,000                               Total cost. .................................... $19.00 $23.50 $380,000 $470,000 * The remaining $6 of fixed manufacturing overhead cost would  not be relevant, since it will continue regardless of whether the  company makes or buys the parts. The $150,000 rental value of the space being used to produce part R-3 
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This note was uploaded on 06/01/2008 for the course ACCT 606 taught by Professor Huh during the Spring '08 term at CSU San Bernardino.

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Chapter 11 - Exercise 11-6(30 minutes 1 Fixed cost per...

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