Management and Cost Accounting Question: Consider the following data regarding S
ID: 341266 • Letter: M
Question
Management and Cost Accounting
Question:
Consider the following data regarding Speed Print's photocopying requirements:
Annual cash operating costs for power, maintenance, toner, and supplies
Required:
(a) Analyze in detail the relevant and irrelevant costs related to keeping or replacing the old photocopier.
(b) Advise the company on what it should do (keep or replace the old photocopier)? Please explain clearly why?
Note:
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Old Photocopier Proposed Replacement Photocopier Useful life, in years 5 3 Current age, in years 2 0 Useful life remaining, in years 3 3 Original cost $25,000 $15,000 Accumulated depreciation $10,000 $0 Book value $15,000 Not acquired yet Disposal value (in cash) now $7,000 Not acquired yet Disposal value in 3 years $0 $0Annual cash operating costs for power, maintenance, toner, and supplies
$14,000 $8,000Explanation / Answer
1. OLD PHOTOCOPIER:
Original cost, accumulated deprecation are irrelevant costs since they are sunk cost. Only the annual cash operating expenses are the relevant cost & revenue from sales is relevant in the decision making process.
PROPOSED PHOTOCOPIER
The cost of the photocopier & annual cash operating expenses are relevant costs ssince they are incremental costs.
2. RELEVANT COST FOROLD PHOTOCOPIER:
Total operating expenses or 3 years = $42,000
RELEVANT COST FFOR NEW PHOTOCOPIER:
Total operating expenses for 3 years = $24,000
Add: Cost of the machine = $ 15,000
Less: Sales value of old machine = $ 7,000
Relevant costs = $32,000
Since the relevant costs for new machine is lower than that of old machine, the company should replace the old machine.
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