This preview shows pages 1–3. Sign up to view the full content.
This preview has intentionally blurred sections. Sign up to view the full version.View Full Document
Unformatted text preview: Chapter 5 Relevant Information for Special Decisions Answers to Questions 1. Information that is relevant for decision making differs between the alternatives and is future oriented. 2. A variable cost may or may not be relevant. The fact that a cost is variable has no bearing on its relevance. For instance, the cost of direct labor is usually considered a variable cost in the decision as to how many products to produce. But labor costs in another de- cision context may be irrelevant. For instance, in a decision as to which of two products to produce when labor cost is the same for both, the cost of labor becomes irrelevant (it is now unavoidable). Also, variable costs that are historical in nature would not be relev- ant. 3. Costs can be classified into the following levels: (1) Unit-level costs - Costs that are incurred each time a company makes a product or performs a service. These costs can be avoided by eliminating the production of a single unit of product or service. (2) Batch-level costs - Costs related to the production of more than one product or performance of more than one service that are organized into batches and completed at the same time. Batch- level costs are eliminated when the batch of work is eliminated. When a batch is eliminated, unit-level costs associated with the units in a batch are also eliminated. (3) Product-level costs - Costs that are incurred to support specific kinds of products or services. Product-level costs are elimin- ated when the product line is discontinued. (4) Facility-level costs - Costs that are incurred on behalf of the en- tire business. These costs are usually totally eliminated when the business is dissolved or they can be partially eliminated when a segment of the business that is in a separate facility is eliminated. 4. Information does not have to be entirely accurate to be relevant for decision making. Knowing that a future cost can be avoided makes the cost relevant even if the exact cost is unknown. Relevance is the 5-1 Chapter 5 Relevant Information for Special Decisions predominant characteristic. Precision only enhances relevance. Ir- relevant data, no matter how precise, is useless to decision making. 5. The conclusion is invalid because it fails to consider the importance of qualitative data. Factors such as company reputation, employee morale, and customer satisfaction are not quantifiable, but are cru- cial to the survival of most businesses. 6. The president appears to be overlooking the concept of sunk cost. His company has already incurred a $50,000 loss. The fact that it has not recognized the loss does not mean that the loss has not been incurred. The loss in market value cannot be avoided by bor- rowing the money for operating activities. The loss (sunk cost) is not relevant and should not be considered. What is important to the decision is whether Carmon today would invest $250,000 by pur- chasing Mann Stock or would the funds be better invested in operat- ing activities? ing activities?...
View Full Document