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 Indicate whether each item is relevant or not relevant in the following situations

Explanation / Answer

Relevant item for making decision in either case are:

Case 1 Reason Case 2 Reason a. Sales revenue being production increase effects profitability. b. Direct material being consumption effect on new machine b. Direct material Do f. book value of Model B100 Machine Being sold away c. direct labor do g. disposal value of Model B100 Machine do d. variable manufacturing overhead do h. Market value - Model B300 Machice purchase amount could be constraint h. Market value - Model B300 Machice purchase amount could be constraint j. Variable selling expense being production increase effects profitability. k. Fixed selling expense do l. General Administrative overhead do

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