estion Relevant Decision Factors

29 Jun estion Relevant Decision Factors

Question
Relevant Decision Factors

63. The following costs relate to a variety of decision settings:

Cost

Decision

1.

Allocated corporate overhead

Closing a money-losing department

2.

Cost of an old car

Vehicle replacement

3.

Direct materials

Make or buy a product

4.

Salary of marketing manager

Project discontinuance; manager to be transferred elsewhere in the firm

5.

Home theater installation

Purchase of a new home

6.

Unavoidable fixed overhead

Plant closure

7.

Research expenditures incurred last year, related to new product

Product introduction to marketplace

8.

$4 million advertising program

Whether to promote product A or B with the $4 million program

9.

Manufactured cost of existing inventory

Whether to discard the goods or sell them to a third-world country

Required:

Consider each of the nine costs listed and determine whether it is relevant or irrelevant to the decision cited. If the cost is irrelevant, briefly explain why.

Relevant Decision Factors

64. Clancy Van Lines is considering the acquisition of two new trucks. Because of improved mileage, these vehicles are expected to have a lower operating cost per mile than the trucks the company plans to replace. Management is studying whether the firm would be better-off keeping the older vehicles or going ahead with the replacement, and has identified the following decision factors to evaluate:

1. Cost and book value of the old trucks

2. Moving revenues, which are not expected to change with the acquisition

3. Operating costs of the new and old vehicles

4. New truck purchase price and related depreciation charges

5. Proceeds from sale of the old vehicles

6. The 8% return on alternative investments that Clancy will forego by tying up cash in the new trucks

7. Drivers’ wages and fringe benefits

Required:

Classify the seven decision factors listed into the following categories (note: factors may be used more than once):

A. Relevant costs.

B. Opportunity costs.

C. Sunk costs.

D. Factors to be considered in the decision.

Relevant Costs

65. Attleboro Company recently discontinued the manufacture of product J15. The standard costs for this product were:

Direct material

$ 50

Direct labor

20

Variable overhead

14

Fixed overhead

35

Total

$119

There are 800 units of this product in finished-goods inventory. The units are technologically obsolete, and the following alternatives are being considered:

1. Dispose of as scrap. The proceeds from the sale will equal the cost of transportation to the disposal site.

2. Sell to an exporter for sale in a developing country. The sales price to the exporter would be $12 per unit.

3. Remanufacture the products to convert them into model J16, a model that normally sells for $200. The additional cost to convert the J15 units would be $45; the standard cost to manufacture J16 is $125. Presently, there is sufficient capacity to manufacture product J16 directly or to do the necessary conversion work on J15.

Required: