Financial and Managerial Accounting Text 15th Edition Jan Williams Chapter 21 Ca

Question

Financial and Managerial Accounting Text 15th Edition Jan Williams Chapter 21

Case 21.2 - Critical Thinking Cases - Page 957

McFriendly Software recently developed new spreadsheet software, Easy-Calc, which it intends to market by mail through ads in computer magazines. Just prior to introducing Easy-Calc, McFriendly receives an unexpected offer from Jupiter Computer to buy all rights to the software for $10 million cash.
Instructions
A. Is the $10 million offer "relevant" financial information?
B. Describe McFriendly's opportunity cost if it (1) accepts Jupiter's offer and (2) turns down the offer and markets Easy-Calc itself. Would these opporunity costs be recorded in McFriendly's accounting records? If so, explain the journal entry to record these costs.
C. Briefly describe the extent to which the dollar amounts of the two opportunity costs described in part b are known to management at the time the decision is made to accept or reject Jupiter's offer.
D. Might there be any other opportuntiy costs to consider at the time of the making this decision? If so, explain briefly.

Explanation / Answer

A. The $10 million would be an opportunity cost because it is something they are giving up in order to market and sell their own product B.If they turn down Jupiter's offer then the opportunity cost is the $10 million, however if they accept the offer the opportunity cost would be what ever they think they are going to make on Easy-Calc. The opportunity costs wouldn't be recorded but unless a transaction is actually made between the two company. C. The dollar amount that they think are going to make in speculative, however the $10 million is pretty much set in stone. It also is going to depend on how much they spent to develop the new software. D. Other opportunity costs would be anything else the company could be doing instead, so an example of this would be instead of offering customer service for Easy-Calc they could spend the money developing something else. Or if they sell the software and something happens that makes that software more valuable they would be missing out on that. Remember that opportunity costs are anything that could be done instead of what is being done. And how much they cost, and what they "losing out on". GOOD LUCK! :D

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