Ch 11 EFILE - Chapter 11 Relevant Costs for Decision Making Exercise 11-7(20 minutes 1 Fixed cost per mile($5,000 50,000 miles $0.10 Variable

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Unformatted text preview: Chapter 11 Relevant Costs for Decision Making Exercise 11-7 (20 minutes) 1. Fixed cost per mile ($5,000* ÷ 50,000 miles)..... $0.10 Variable cost per mile......................................... 0.07 Average cost per mile......................................... $0.17 * Insurance........................... $1,600 Licenses............................. 250 Taxes................................. 150 Garage rent........................ 1,200 Depreciation....................... 1,800 Total................................... $5,000 This answer assumes the resale value of the truck does not decline because of the wear-and-tear that comes with use. 2. The insurance, the licenses, and the variable costs (gasoline, oil, tires, and repairs) would all be relevant to the decision because these costs are avoidable by not using the truck. (However, the owner of the garage might insist that the truck be insured and licensed if it is left in the garage. In that case, the insurance and licensing costs would not be relevant because they would be incurred regardless of the decision.) The taxes would not be relevant because they must be paid regardless of use; the garage rent would not be relevant because it must be paid to park the truck; and the depreciation would not be relevant because it is a sunk cost. However, any decrease in the resale value of the truck due to its use would be relevant. 3. Only the variable costs of $0.07 would be relevant because they are the only costs that can be avoided by having the delivery done commercially. 4. In this case, only the fixed costs associated with the second truck would be relevant. The variable costs would not be relevant because they would not differ between having one or two trucks. (Students are inclined 11-1 to think that variable costs are always relevant in decision-making, and to think that fixed costs are always irrelevant. This requirement helps to dispel that notion.) 11-2 Exercise 11-8 (30 minutes) No, the bilge pump product line should not be discontinued. The computations are: Contribution margin lost if the line is dropped....... €(460,000) Fixed costs that can be avoided: Advertising......................................................... €270,000 Salary of the product line manager.................... 32,000 Insurance on inventories.................................... 8,000 310,000 Net disadvantage of dropping the line.................. €(150,000 ) The same solution can be obtained by preparing comparative income statements: Keep Product Line Drop Product Line Difference: Net Operating Income Increase or...
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This note was uploaded on 02/02/2011 for the course ACCT 226 taught by Professor Smith during the Fall '10 term at South Carolina.

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Ch 11 EFILE - Chapter 11 Relevant Costs for Decision Making Exercise 11-7(20 minutes 1 Fixed cost per mile($5,000 50,000 miles $0.10 Variable

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