Exercise 12-1 Identifying Relevant Costs [L012-1] A number of costs are listed b

Question

Exercise 12-1 Identifying Relevant Costs [L012-1] 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. 1. The company chronically has no idle capacity and the old Model 8100 machine is the company's constraint. Management is considening purchasing a Model B300 machine to use in addition to the company's present Model B100 machine. The old Model 8100 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. 2. 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 Required: Indicate whether each item is relevant or not relevant in the following D. Iuirect matenais C. Direct labor d. overhead B100 machine Book value-Model B100 machine Disposal value-Model B100 machine Market value-Model B300 machine (cost Fixed manufacturing overhead Variable s k. Fixed General administrative overhead

Explanation / Answer

Identification of Relevant Cost as per Alternative -1 Particular Relevent Not Relevent Sales Revenue X Direct Material X Direct Labour X Variable Manufacturing Overhead X Depreciaiton - Model B100 Machine X Book Value Model B100 Machine X Disposal Value- Model B100MAchine X Market Value - Model B100 Machine (Cost) X Fixed Manufacturing Overhead ( General) X Variable Selling Expense X Fixed Selling expense X General administrative Overhead. X Identification of Relevant Cost as per Alternative -2 Particular Relevent Not Relevent Sales Revenue X Direct Material X Direct Labour X Variable Manufacturing Overhead X Depreciaiton - Model B100 Machine X Book Value Model B100 Machine X Disposal Value- Model B100MAchine X Market Value - Model B100 Machine (Cost) X Fixed Manufacturing Overhead ( General) X Variable Selling Expense X Fixed Selling expense X General administrative Overhead. X

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