Exam 13: Relevant Information for Special Decisions

The Enhanced Products Division of Forrest Industries makes ceramic pots that are used to hold large decorative plants. During 2013, the division produced 10,000 pots and incurred the following costs: *The equipment was purchased for $150,000 and has a current book value of $120,000, remaining useful life of four years, and a zero salvage value. If the company does not use the equipment, it can be leased for $8,000 per year. **Includes supervisors' salaries and rent for manufacturing plant. Required: The division is considering replacing the equipment used to manufacture its ceramic pots. Replacement equipment can be purchased at a price of $200,000. The new equipment, which is expected to last 4 years and have a salvage value of $20,000, will reduce unit-level labor costs by 25 percent. Assuming the division desires to maintain its production and sales at 10,000 ceramic pots per year, prepare a schedule that shows the relevant cost of operating the existing equipment versus the cost of operating the new equipment. Should the existing equipment be replaced? Why or why not?

Indicate whether each of the following statements is true or false. 1. A cost that is relevant to one decision may be irrelevant to another. 2. To be relevant in decision making, cost information need not be exactly correct. 3. When making decisions in business, information that cannot be quantified (expressed in numbers) generally is not relevant. 4. Eliminating a segment of a business may eliminate some facility-level costs. 5. The sacrifice represented by a lost opportunity is an opportunity cost.

What is a segment elimination decision? Under what conditions should a company decide to eliminate a segment?

Benitez Company currently outsources a relay switch that is a component in one of its products. The switches cost $20 each. The company is considering making the switches internally at the following projected annual production costs: Unit-level material cost \ 3 Unit-level labor cost \ 2 Unit-level overhead \ 1 Batch-level set-up cost (5,000 units per batch) \ 25,000 Product-level supervisory salaries \ 37,500 Allocated facility-level costs \ 20,000 The company expects an annual need for 5,000 switches. If the company makes the product, it will have to utilize factory space currently being leased to another company for $1,500 a month. If the company decides to make the parts, total costs will be:

Monica paid $12 for a music CD for which she later was offered $15. After that someone offered her $18 for the CD. If Monica keeps the CD, the amount of her opportunity cost is $33.

Bates Company plans to add a new item to its line of consumer product offerings. Two possible products are under consideration. Each unit of Product A costs $6 to produce and has a contribution margin of $3, while each unit of Product B costs $12 and has a contribution margin of $4. What is the differential revenue for this decision?