Question

1. Sally wants to purchase a new sofa because she purchased a new home at the beach. Sally visited two stores and she narrowed down her choices to a red sofa and a blue sofa. Sally owns pets so she considers the cost of insurance to insure each sofa. Sally compiled the following data and she realizes that the sales tax to purchase the sofa is 10% in her state. (5 points) Prion Insurance Red Sofa $8,000 $950 Blue Sofa $6,400 $350 Which sofa should Sally purchase? What costs are relevant in her decision? Why? 2. Norman Company manufactures two models of microcassette recorders, VCH and MTV. Based on the following production data for April of the current year, prepare a production budget for April. (10 points) VCH MTV Estimated inventory (units), April 1 2,600 3,900 Desired inventory (units), April 30 5,200 3,250 Expected sales volume (units): Eastern zone 10,500 12,960 Midwest zone 17,000 19,800 Western Zone 9,840 4,500

Answer 1

Part 1) Calculation of Relevant cost

	Red sofa	Blue sofa	Incremental Cost
Price	8000	8400	(400)
Sales tax 10%	800	840	(40)
Insurance	950	350	600
Total	9750	9590	160

Sally should purchase BLUE SOFA, since it involves lowest total cost.

Relevant costs for decision making is purchase price, sales tax and insurance.

Part 2) Production Budget for April

	VCH	MTV
Ending desired inventory	5200	3250
Add- Expected Sales
Eastern zone	10500	12960
Midwest zone	17000	19800
Western Zone	4500	9840
Total needs	37200	45850
Less - Beginning estimated inventory	(2600)	(3900)
Production required	34600	41950