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Unformatted text preview: 157 1520 (continued) The order should be accepted. Note that the original purchase cost of the lathe and its current book value are irrelevant to this decision. This is because both amounts are the result of past decisions and cannot be affected by the current decision of whether or not to produce the table legs. Note to Instructor: Although not a recommended solution procedure, the following comparison of the alternatives may be made by some students. Profit from selling Profit from producing the machine: table legs: Residual value $4,800 Sales revenue $55,000 Book value (4,000) Materials, labor , and variable overhead $49,900 Depreciation 4,000 (53,900) Profit from the Gain on sale $ 800 order $ 1 100 , Note that this solution procedure correctly shows that selling the machine produces $300 less profit than accepting and filling the order for table legs. It also shows the irrelevance of the $4,000 book value of the machine which is deducted in both the computation of the gain on the sale of the lathe and the computation of profit from accepting the order . Eliminating the $4,000 book value from each computation in this latter comparison improves this analysis by removing irrelevant information and makes the second solution procedure equivalent to the original one shown. 1521 (1) Discontinuation of scooter production would result in: Avoided costs: Variable manufacturing and selling costs (5,000 @ $1 7) $85,000 Fixed costs 45,000 $130,000 Lost sales (5,000 @ $25) (125,000) Increase in profit $ 5,000 ...
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This note was uploaded on 04/08/2008 for the course ACC 102 taught by Professor Drucker during the Fall '07 term at Coastal Carolina University.
- Fall '07