1.Colson-Howard Company operates a store in downtown Savannah that has five depa
ID: 2415840 • Letter: 1
Question
1.Colson-Howard Company operates a store in downtown Savannah that has five departments including a sporting goods department. If the sporting goods department is closed, the store manager's position will not be affected, but if the entire store is closed, the manager will be terminated. Which of the following lessons should be learned from this example? A. Relevance of costs is context sensitive. B. Sunk costs cannot be avoided. C. Opportunity costs are always present. D. Information does not have to be precisely accurate in order to be relevant. 2. Robert is deciding whether to remain in the home he has lived in for the past ten years, which is located very near his work, or to move into a newer home that is located in the suburbs further from his job. The old house was purchased for $140,000 and has a market value of $200,000. The new home can be purchased for $275,000. Which of the following is not relevant to Robert's decision? 3. Trail Power has been using the same machines to make its name brand clothing for the last five years. A cost efficiency consultant has suggested that production costs may be reduced by purchasing more technologically advanced machinery. The old machines cost the company $200,000. The old machines presently have a book value of $120,000 and a market value of $12,000. They are expected to have a five-year remaining life and zero salvage value. The new machines would cost the company $100,000 and have operating expenses of $18,000 a year. The new machines are expected to have a five-year useful life and no salvage value. The operating expenses associated with the old machines are $30,000 a year. The new machines are expected to increase quality, justifying a price increase, and thereby increasing sales revenue by $10,000 a year. Select the true statement. A. The company will be $28,000 better off over the 5-year period if it keeps the old equipment. B. The company will be $40,000 better off over the 5-year period if it keeps the old equipment. C. The company will be $22,000 better off over the 5-year period if it replaces the old equipment. D. The company will be $12,000 better off over the 5-year period if it replaces the old equipment. 4. In the short run, asset replacement decisions often result in lower reported profits in the period of replacement. Why might this be true? A. The new asset must be paid for in the period of replacement. B. The cost savings or increase in revenues generated by the new asset may not start immediately. C. Often, a loss on disposal of the existing asset must be reported in the period of replacement. D. The cost savings or increase in revenues generated by the new asset may not start immediately and/or often, a loss on disposal of the existing asset must be reported in the period of replacement. 5. Breezy Company is disposing of equipment that was originally purchased for $300,000 and has $120,000 of accumulated depreciation to date. The same equipment would cost $420,000 to replace. What is the total amount of sunk cost? A. $120,000 B. $180,000 C. $300,000 D. $420,000
Explanation / Answer
Ans 1A. Relevance of costs is context sensitive.
Context sensitive means the a particular cost that is relevant in one context may be irrelevant in another.This means if department is closed but still the manger salary is to be given it is relevant but if the store is closed than all cost becomes irrelevent.
Ans 2 The cost of old house $140000 is not relevant as he will compare between market value of old house which he can receive and $275000 which he has to pay if he changes.
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