costacctg13_sm_ch11 - CHAPTER 11 DECISION MAKING AND...

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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) Remachine Scrap Future revenues $30,000 $3,000 Deduct future costs 25,000 Operating income $ 5,000 $3,000 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) Replace Rebuild 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. 11-1
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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 11-2
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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 Special Order 7,500 Units With One- Time Only Special Order 10,000 Units Difference 2,500 Units Revenues $1,125,000 $1,375,000 $250,000 Variable costs: Direct materials 262,500 350,000 1 87,500 Direct manufacturing labor
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costacctg13_sm_ch11 - CHAPTER 11 DECISION MAKING AND...

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