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112 1116 20min disposalofassets 1 this is an

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Unformatted text preview: optimal solut ion. 11­15 The text outlines two methods of determining the optimal so lution to an LP problem: (i) Trial­and­error solut ion approach (ii) Graphical so lut ion approach Most LP applicat ions in pract ice use standard software packages that rely on the simplex method to compute the optimal so lut ion. 11­2 11­16 (20 min.) Disposal of assets. 1. This is an unfortunate situation, yet the $75,000 costs are irrelevant regarding the decisio n 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 inco me will be maximized (or losses minimized). The difference in favor of remachining is $2,000: (a) (b) Remachine Scrap Future revenues Deduct future costs Operating inco me Difference in favor of remachining $30,000 25,000 $ 5,000 $2,000 $3,000 – $3,000 2. This, too, is an unfortunate situation. But the $100,000 original cost is irrelevant to this decisio n. The difference in relevant costs in favor of rebuilding is $5,000 as fo llows: (a) Replace New truck Deduct current disposal price of exist ing truck Rebuild exist ing truck $105,000 15,000 – $ 90,000 $5,000 (b) Rebuild – – $85,000 $85,000 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. 11­3 11­17 (20 min.) Relevant and irrelevant costs. 1. Make Relevant costs Variable costs Avo idable fixed costs Purchase price Unit relevant cost $180 20 ____ $200 Buy $210 $210 Dalton Computers should reject Peach’s o ffer. The $30 of fixed costs are irrelevant because they will be incurred regardless o f this decisio n. When comparing relevant costs between the cho ices, Peach’s o ffer price is higher than the cost to continue to produce. 2. Cash operating costs (4 years) Current disposal value of old machine Cost of new machine Total relevant costs Keep $80,000 _...
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