Decision Making and Relevant Information
CHAPTER 11
DECISION MAKING AND RELEVANT INFORMATION
11-16 (20 min.) Disposal of assets.
1. This is an unfortunate situation, yet the $75,000 costs are irrelevant regarding the decision to remachine or scrap. The only relevant factors are the future revenues and future costs. By ignoring the accumulated costs and deciding on the basis of expected future costs, operating income will be maximized (or losses minimized). The difference in favor of remachining is $2,000: (a) (b) Remachine Scrap Future revenues $30,000 $3,000 Deduct future costs 25,000 – Operating income $ 5,000 $3,000 [pic] Difference in favor of remachining $2,000
2. This, too, is an unfortunate situation. But the $100,000 original cost is irrelevant to this decision. The difference in relevant costs in favor of rebuilding is $5,000 as follows:
(a) (b)
Replace Rebuild
New truck $105,000 – Deduct current disposal price of existing truck 15,000 – Rebuild existing truck – $85,000 $ 90,000 $85,000
Difference in favor of rebuilding $5,000
Note, here, that the current disposal price of $15,000 is relevant, but the original cost (or book value, if the truck were not brand new) is irrelevant.
11-17 (20 min.) Relevant and irrelevant costs.
1.
| |Make |Buy |
|Relevant costs | | |
| Variable costs |$180 | |
| Avoidable fixed costs | 20 | |
| Purchase price |____ |$210 |
| Unit relevant cost |$200 |$210 |
Dalton Computers should reject Peach’s offer. The $30 of fixed costs are irrelevant because they will be incurred regardless of this decision. When comparing relevant costs between the choices, Peach’s offer price is higher than the cost to continue to produce.
2.
|
DECISION MAKING AND RELEVANT INFORMATION
11-16 (20 min.) Disposal of assets.
1. This is an unfortunate situation, yet the $75,000 costs are irrelevant regarding the decision to remachine or scrap. The only relevant factors are the future revenues and future costs. By ignoring the accumulated costs and deciding on the basis of expected future costs, operating income will be maximized (or losses minimized). The difference in favor of remachining is $2,000: (a) (b) Remachine Scrap Future revenues $30,000 $3,000 Deduct future costs 25,000 – Operating income $ 5,000 $3,000 [pic] Difference in favor of remachining $2,000
2. This, too, is an unfortunate situation. But the $100,000 original cost is irrelevant to this decision. The difference in relevant costs in favor of rebuilding is $5,000 as follows:
(a) (b)
Replace Rebuild
New truck $105,000 – Deduct current disposal price of existing truck 15,000 – Rebuild existing truck – $85,000 $ 90,000 $85,000
Difference in favor of rebuilding $5,000
Note, here, that the current disposal price of $15,000 is relevant, but the original cost (or book value, if the truck were not brand new) is irrelevant.
11-17 (20 min.) Relevant and irrelevant costs.
1.
| |Make |Buy |
|Relevant costs | | |
| Variable costs |$180 | |
| Avoidable fixed costs | 20 | |
| Purchase price |____ |$210 |
| Unit relevant cost |$200 |$210 |
Dalton Computers should reject Peach’s offer. The $30 of fixed costs are irrelevant because they will be incurred regardless of this decision. When comparing relevant costs between the choices, Peach’s offer price is higher than the cost to continue to produce.
2.
|