Question

Knowledge Check Eva pays $3.000 per month to rent her house. She has a garage but is considering turning the space into a halr styling studio. She expects to earn $3.000 a month from this new business. Instead, she could sublease the garage space to a neighbor for $800 per month. As part of the terms of sublease, her neighbor will pay an additional $100 per month for utilities. All other costs are unaffected. Eva is now analyzing the costs and benefits of these alternatives Help Eva in her analysis by identifying the following items as either a relevant cost or irrelevant cost in the decision 1. The rentald on the house The e ings from the har styling studio ne cost of homenance The cost often 3. The y come from renting there

Answer 1

From the information given above, I have answered all the questions with explanations below:

1. Information given in the problem Eva pays $3000 rent per month By starting new business she expects to earn $3000 Instead she could sublease the space to neighbor for $800 per month and additional $100 per month for the utilities Identifying the folloeing items as either a relevant cost or irrelevant cost in the decision. 10 11 12 13 14 15 16 Relevant/ Particulars Irrelevent Explanation 1 The rent paid on the house Irrelevent Rent paid is a sunk cost and it will be incurred irrespective of stating a new business/subleasing a space. 2 The earnings from the hair stying studio Relevent It is a opportunity cost, the earings lost if the space is sublease to a neighbor, relevent in the decision making, 3 The cost of home insurance Irrelevent home insurance paid is a irrelevent cost,since it will be incurred irrespective of stating a new business/subleasing a space. 4 The cost of utilities Irrelevent cost of utilities paid is a irrelevent cost, since it will be incurred irrespective of stating a new business/subleasing a space. 5 The monthly income from renting the garage Relevent It is a opportunity cost, the earings lost if the space is used to start a hair styling studio, relevent in the decision making. 17 18 Knowledge Check 1 Information given in the problem Flexcore Inc received a special order from from one of its customers to sell its product for a price less than a normal selling price. Flexcore has idle production capacity necessary to fill this order Which of the costs is likely to be irrelevant to the decision? Solution: Fixed manufacturing overhead, since it will be incurred irrespective of accepting or not the special order. Relevent costs are direct materials, direct labor, variable manufacturing overhead in the decision making. 20 21 22 23 24

25 Knowledge Check 2 26 27 28 29 Information given in the problem Fruit first produces and sells dried fruit basket for $20 each Received special order from Carol Castellano for 150 baskets at a special price of $16. The company incurrs variable cost of $11 and fixed manufacturing overhead cost of $6 per unit of fruit basket The company has excess capacity to fill this special order, should the company accept this order? Solution: Yes, the special order must be accepted because the company has the excess capacity to fill the order. The variable cost to produce per unit of fruit basket is $11 which can be recovered with the special price offered $16. Fixed manufacturing overhead cost is irrelevent in decision making, as it will be incurred irrespective of accepting or not the special order. 30 31 33 34 35 36 37 38 39 Knowledge Check Information given in the problem Delightful Inc manufactures and sells lamp.lt currently produces al parts in its Oregon factory. One of its vendors has offered to do the packaging for a price of $2 per unit.What type of decision is the management making? Solution: It is a Insourcing versus outsoucing decision, the company is deciding whether to package the products internally or to outsource the packaging work to a vendor at a cost of $2 per unit. Special order decision means a one time opportunity to accept or reject a special order that a company receives from one of its customer for a specified quantity of its product or service. Keep or drop decision is where a company internally decides whether to continue or discontine a product line/segment. Sell or process further decision it where a company is internal decision whether to sell the goods manufactured at this stage or to process the goods further to sell a better price. Continue or discontinue decision is where a company internally decides whether to continue or discontine a product line/business segment. 40 41 42 43 44

SI 46 47 48 49 50 Knowledge Check Information given in the problem Pinnacle Inc produces various computer parts internally but it is considering buying the sensors from an external customer Sensemore Inc at $9 per unit. Pinnacle incurrs variable cost of $7 and fixed costs of $3.By outsourcing it can avoid all variable costs and use its production facility to produce other parts. What factors are relevent in decision making? Solution: Variable costs of producing the sensors is relevent factor in decision making, since by outsourcing all variable costs can be avoided. Irrelevent factors are: Fixed costs are irrelevent since it will be incurred irrespective of oustsoucing or producing internally, Revenue generated by selling anytouch is irrelevent to producing parts internally or outsourcing. Cost of equipment used to manufactured the sensors is sunk cost,which is already incurred hence irrelevent. 51 52 53 54 55 56 57 58