Chapter 7 - LectureChapter7 Sunkcosts:...

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Lecture  – Chapter 7 Relevant Costing Part I
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Relevant Costs and Benefits Sunk costs: are costs that have already  been incurred. They do not affect any  future cost and cannot be changed by any  current future action.      ARE IRRELEVANT
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Relevant Costs  Example: Buying  a new Equipment vs. keeping the old one. Data:     Acquisition Old loader             $100,000                  Less Acc. Depreciation               (75,000)    Book Value $25,000    Proceeds from sale now   $5,000    Useful life remaining               1 year    Salvage value                                             $0     Annual operating costs $80,000
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Relevant Costs Acquisition of the new system $15,000 Useful life  1 year Salvage value after one year 0    Annual depreciation  $15,000    Annual operating costs $45,000
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More on relevant costs… Using obsolete part vs. buying new ones Data:  Original cost of obsolete parts  $20,000 Selling price today   $17,000 Cost to modify the parts to reuse them  $12,000
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Special Decisions 1. Accept or Reject Special Offer 2. Outsource a product or service 3. Add or Drop a Service, Product, or  Department. 4. Scarce Resources 5. To process further
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Special Order
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Accept or Reject Special Order A travel agency offers Worldwide Airways $150,000 for a  round-trip flight from Hawaii to Japan on a jumbo jet.
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