A number of costs are listed below that may be relevant in decisions faced by th

Question

A number of costs are listed below that may be relevant in decisions faced by the management of Svahn, AB, a Swedish manufacturer of sailing yachts:

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

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 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.

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.

A number of costs are listed below that may be relevant in decisions faced by the management of Svahn, AB, a Swedish manufacturer of sailing yachts:

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

Explanation / Answer

Case 1 Case 2 Sales revenue Relevant Not Relevant Direct materials Relevant Relevant Direct labor Relevant Not Relevant Variable manufacturing overhead Relevant Not Relevant Depreciation-Model B100 machine Not Relevant Not Relevant Book value-Model B100 machine Not Relevant Not Relevant Disposal value-Model B100 machine Not Relevant Relevant Market value-Model B300 machine (cost) Relevant Relevant Fixed manufacturing overhead (general) Not Relevant Not Relevant Variable selling expense Relevant Not Relevant Fixed selling expense Relevant Not Relevant General administrative overhead Relevant Not Relevant

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