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

Question

Svahn, AB, is a Swedish manufacturer of sailing yachts. The company has assembled the information shown below that pertains to two 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 8100 machine will continue to be used to capacity as before, with the new Model B300 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 expenses and in general administrative overhead, but not in the fixed manufacturing overhead Case B The old Model B100 machine is not the company's constraint, but management is considering replacing it with a new Model B300 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 f. Book value-Model B100 machine g. Disposal value-Model B100 machine h. Market value-Model B300 machine (cost) i. Fixed manufacturing overhead (general) j. Variable selling expense k. Fixed selling expense l. General administrative overhead

Explanation / Answer

Item Case A Case B

a. Sales Revenue x -

b. Direct Materials x x

c. Direct Labour x -

d. Variable Manu

facturing Overhead x -

e. Depreciation

Model B100 - -

f. Book Value

Model B100 - -

g. Disposal Value

Model B100 - x

h. Market Value

Model B300 x x

i. Fixed Manufacturing

overhead - -

j. Variable Selling

Expenses x -

k. Fixed Selling Exps x -

l. General Administration

overhead x -

Notes

Relevant costs are those costs that are incurred in future due to management decision making and that differ under

various decision alternatives available.

Non cash item like depreciation is not considered,

Sunk costs which are incurred in past are not relevant for the decision making like book value of machinery.

Fixed costs which differ under various alternatives are relevant costs.

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