3 Svahn, AB, is a Swedish manufacturer of sailing yachts. The company has assemb

Question

3 Svahn, AB, is a Swedish manufacturer of sailing yachts. The company has assembled the information shown below that pertains to tweo independent decision-making contexts Case A: The company chronically has no idle capacity and the old Model B100 machine is the company's constraint. Management is considering purchasing a Model B300 machine to use in addition to the company's present Model B100 machine. The old Model B100 machine will continue to be used to capacity as before, with the new Model 8300 machine being used to expand production. This will increase the company's production and sales. The increase in volume will be large enough to require increases in fixed selling eBook Pnt expenses and in general administrative overhead, but not in the fixed manufacturing overhead ferences Case B The old Model 8100 machine is not the company's constraint, but management is considering replacing it with a new Model 8300 machine because of the potential savings in direct materials with the new machine. The Model B100 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: Copy the information below onto your answer sheet and place an X in the appropriate column to indicate whether each item is relevant or irrelevant to the decision context described in Case A and Case B Item Case A Case B a. Sales revenue b. Direct materials c. Direct labor d. Variable manufacturing overhead e. Depreciation-Model B100 machine . Book value- Model B100 machine g. Disposal value-Model B100 machine h Markat walise Modal 830n marhine Imet Mc

Explanation / Answer

Case 1 Case 2     Relevant    Not Relevant Relevant No relevant Sales Revenue X X Direct Materials X X Direct labor X X Variable manufacturing overhead X X Depreciation—Model B100 machine X X Book value—Model B100 machine X X Disposal value—Model B100 machine X X Market value—Model B300 machine (cost) X X Fixed manufacturing overhead (general) X X Variable selling expense X X Fixed selling expense X X General administrative overhead X X Case A As machine has no idle capacity, so new machine is required hence if it is purchased than there would be increase in sales hence all the related expense will increase, so those are relevant. Depreciation, book value of old machine these are sunk cost hence irrelevant Case B In case B as the old machine can be sold hence disposal value is relevant. If new machine is purchases than there is saving in direct material hence relevant Market value of new machine is always relevant

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