026 104 40 25 10 8 identifying relevant

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Unformatted text preview: 104 ???? $ 40 ???? ???? $ 25 10-8 Identifying Relevant Costs Which costs and benefits are relevant in Cynthia’s Which costs and benefits are relevant in Cynthia’s decision? decision? The cost of the car is a sunk cost and is not relevant to the current decision. The annual cost of insurance is not relevant. It will remain the same if she drives or takes the train. However, the cost of gasoline is clearly relevant if she decides to drive. If she takes the train, the cost would not be incurred, so it varies depending on the decision. 10-9 Identifying Relevant Costs Which costs and benefits are relevant in Cynthia’s decision? The cost of The maintenance and repairs is relevant. In the long-run these costs depend upon miles driven. The monthly school The parking fee is not relevant because it must be paid if Cynthia drives or takes the train. At this point, we can see that some of the average cost of $0.619 per mile are relevant and others are not. 10-10 Identifying Relevant Costs Which costs and benefits are relevant in Cynthia’s decision? The decline in resale The value due to additional miles is a relevant cost. The round-trip train fare is clearly relevant. If she drives the cost can be avoided. Relaxing on the train is relevant even though it is difficult to assign a dollar value to the benefit. The kennel cost is not The relevant because Cynthia will incur the cost if she drives or takes the train. 10-11 Identifying Relevant Costs Which costs and benefits are relevant in Cynthia’s decision? The cost of parking in The New York is relevant because it can be avoided if she takes the train. The benefits of having a car in New York and The the problems of finding a parking space are both relevant but are difficult to assign a dollar amount. 10-12 Identifying Relevant Costs From a financial standpoint, Cynthia would be better off taking the train to visit her friend. Some of the nonfinancial factors may influence her final decision. Relevant Financial Cost of Driving Gasoline (460 @ $0.100 per mile) Maintenance (460 @ $0.065 per mile) Reduction in resale (460 @ $0.026 per mile) Parking in New York (2 days @ $25 per day) Total $ 46.00 29.90 11.96 50.00 $ 137.86 Relevant Financial Cost of Taking the Train Round-trip ticket $ 104.00 10-13 Total and Differential Cost Approaches The management of a company is considering a new labor-saving machine that rents for $3,000 per year. Data about the company’s annual sales and costs with and without the new machine are: Sales (5,000 units @ $40 per unit) Less variable expenses: Direct materials (5,000 units @ $14 per unit) Direct labor (5,000 units @ $8 and $5 per unit) Variable overhead (5,000 units @ $2 per unit) Total variable expenses Contribution margin Less fixed expense: Other Rent on new machine Total fixed expenses Net operating income Current Situation $ 200,000 Situation W ith New Machine $ 200,000 Differential Costs and Benefits - 70,000 40,000 10,000 120,000 80,000 70,000 25,000 10,000 105,000 95,000 15,000 15,000 62,000 62,000 18,000 62,000 3,000 65,000 30,000 (3,000) (3,000) 12,000 $ $ 10-14 Total and Differential Cost Approaches As you can see, the only costs that differ between the alternatives are the direct labor costs savings and the increase in fixed rental costs. Current Situatio...
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This document was uploaded on 03/23/2014.

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