Help solving please 021-1 through L021-3, 021-5 CASE 21.2 Relevant Information a
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021-1 through L021-3, 021-5 CASE 21.2 Relevant Information and Opportunity Costs 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 opportunity costs be recorded in McFriendly's accounting records? If so, explain the journal entry to record these costs. 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. Might there be any other opportunity costs to consider at the time of making this decision? If so, explain briefly. c. d.Explanation / Answer
a. Relevant financial information refer to those revenuea and benefits that would differ among alternatives.
Opportunity costs therefore are relevant to decision making.
b. If McFriendly decides to
1. Accept Jupiter's offer : The opportunity cost would be the present value of cash inflows in excess of $ 10 million, if Mcfriendly had rejected the offer.
2. Turn down Jupiter's offer : The opportunity cost would be $ 10 million offerfrom Jupiter foregone.
Opportunity costs are never recorded in an entity's accounting records, as it would be a violation of the cost principle of GAAP. Opportunity costs exist in the realms of management accounting. They do not belong either in financial or cost accounting.
c. The opportunity cost ( The excess future cash flows that the company will be sacrificing) in alternative 1 is not known to the management with certainty. It depends on a number of factors like the success of the advertising efforts, the product quality, the level of competition in the market etc.
On the other hand, if McFriendly decides to reject the $ 10 million offer, the opportunity cost is known with certainty, i.e $ 10 million.
d. If Mcfriendly had expected that through marketing and selling Easy-Calc, it would be making inroads into new geographies, and earned cash inflows therefrom, the present value of those cash inflows would be an opportunity cost if the Jupiter order is accepted.
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