Exercise 12-1 Identifying Relevant Costs [LO1] Please show details on how you ar

Question

Exercise 12-1 Identifying Relevant Costs [LO1]

Please show details on how you arrived at your answers as this is very helpful. Thank you!

Requirement 1 relates to Case 1, and requirement 2 relates to Case 2. Consider the two cases independently.

The company chronically runs at capacity and the old Model A3000 machine is the company’s constraint. Management is considering the purchase of a new Model B3800 machine to use in addition to the company’s present Model A3000 machine. The old Model A3000 machine will continue to be used to capacity as before, with the new Model B3800 being used to expand production. The increase in volume will be large enough to require increases in fixed selling expenses and in general administrative overhead, but not in the general fixed manufacturing overhead..

The old Model A3000 machine is not the company’s constraint, but management is considering replacing it with a new Model B3800 machine because of the potential savings in direct materials cost with the new machine. The Model A3000 machine would be sold. This change will have no effect on production or sales, other than some savings in direct materials costs due to less waste.

Required:

Indicate whether each item is relevant or not relevant in the above situations.

Exercise 12-1 Identifying Relevant Costs [LO1]

Please show details on how you arrived at your answers as this is very helpful. Thank you!

A number of costs are listed in the table that may be relevant in decisions faced by the management of Poulsen & Sonner A/S, a Danish furniture manufacturer:

Requirement 1 relates to Case 1, and requirement 2 relates to Case 2. Consider the two cases independently.

1.

The company chronically runs at capacity and the old Model A3000 machine is the company’s constraint. Management is considering the purchase of a new Model B3800 machine to use in addition to the company’s present Model A3000 machine. The old Model A3000 machine will continue to be used to capacity as before, with the new Model B3800 being used to expand production. The increase in volume will be large enough to require increases in fixed selling expenses and in general administrative overhead, but not in the general fixed manufacturing overhead..

2.

The old Model A3000 machine is not the company’s constraint, but management is considering replacing it with a new Model B3800 machine because of the potential savings in direct materials cost with the new machine. The Model A3000 machine would be sold. This change will have no effect on production or sales, other than some savings in direct materials costs due to less waste.

Required:

Indicate whether each item is relevant or not relevant in the above situations.

Item Case 1 Case 2   a.   Sales revenue   (Click to select)RelevantNot relevant   (Click to select)RelevantNot relevant   b.   Direct materials   (Click to select)RelevantNot relevant   (Click to select)RelevantNot relevant   c.   Direct labor   (Click to select)RelevantNot relevant   (Click to select)RelevantNot relevant   d.   Variable manufacturing overhead   (Click to select)RelevantNot relevant   (Click to select)RelevantNot relevant   e.   Book value—Model A3000 machine   (Click to select)RelevantNot relevant   (Click to select)RelevantNot relevant   f.   Disposal value—Model A3000 machine   (Click to select)RelevantNot relevant   (Click to select)RelevantNot relevant   g.   Depreciation—Model A3000 machine   (Click to select)RelevantNot relevant   (Click to select)RelevantNot relevant   h.   Market value—Model B3800 machine (cost)   (Click to select)RelevantNot relevant   (Click to select)RelevantNot relevant   i.   Fixed manufacturing overhead (general)   (Click to select)RelevantNot relevant   (Click to select)RelevantNot relevant   j.   Variable selling expense.   (Click to select)RelevantNot relevant   (Click to select)RelevantNot relevant   k.   Fixed selling expense   (Click to select)RelevantNot relevant   (Click to select)RelevantNot relevant   l.   General administrative overhead   (Click to select)RelevantNot relevant   (Click to select)RelevantNot relevant

Explanation / Answer

Sr. no

Item

Case 1

Case 2

  a.

  Sales revenue

Relevent

Irrelevent

  b.

  Direct materials

Relevent

Relevent

  c.

  Direct labor

Relevent

Irrelevent

  d.

  Variable manufacturing overhead

Relevent

Irrelevent

  e.

  Book value—Model A3000 machine

Irrelevent

Irrelevent

  f.

  Disposal value—Model A3000 machine

Irrelevent

Relevent

  g.

  Depreciation—Model A3000 machine

Irrelevent

Irrelevent

  h.

  Market value—Model B3800 machine (cost)

Relevent

Relevent

  i.

  Fixed manufacturing overhead (general)

Irrelevent

Irrelevent

  j.

  Variable selling expense.

Relevent

Irrelevent

  k.

  Fixed selling expense

Relevent

Irrelevent

  l.

  General administrative overhead

Relevent

Irrelevent

Sr. no

Item

Case 1

Case 2

  a.

  Sales revenue

Relevent

Irrelevent

  b.

  Direct materials

Relevent

Relevent

  c.

  Direct labor

Relevent

Irrelevent

  d.

  Variable manufacturing overhead

Relevent

Irrelevent

  e.

  Book value—Model A3000 machine

Irrelevent

Irrelevent

  f.

  Disposal value—Model A3000 machine

Irrelevent

Relevent

  g.

  Depreciation—Model A3000 machine

Irrelevent

Irrelevent

  h.

  Market value—Model B3800 machine (cost)

Relevent

Relevent

  i.

  Fixed manufacturing overhead (general)

Irrelevent

Irrelevent

  j.

  Variable selling expense.

Relevent

Irrelevent

  k.

  Fixed selling expense

Relevent

Irrelevent

  l.

  General administrative overhead

Relevent

Irrelevent

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