Question

Svahn, AB, is a Swedish manufacturer of sailing yachts. The company has assembled the information shown below that pertains to two independent decision-making contexts. Case A: The company chronically has no idle capacity and the old Model B100 machine is the company's constraint. Management is considering purchasing a Model B300 machine to use in addition to the company's present Model B100 machine. The old Model B100 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. Case B: 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: Based on the information provided above indicate in the appropriate column whether each item is relevant or irrelevant to the decision context described in Case A and Case B. Case A Case B Item a. Sales revenue b. Direct materials c. Direct labor d. Variable manufacturing overhead e. Depreciation—Model B100 machine f. Book value—Model B100 machine g. Disposal value-Model B100 machine h. Market value-Model B300 machine (cost) i. Fixed manufacturing overhead (general) j. Variable selling expense k. Fixed selling expense 1. General administrative overhead
please answer all questions correctly. Thank You

Answer 1

Relevant cost is the cost which affect the decision making between various alternatives. The cost that do not change the decision making are irrelevant costs.

For Example :- If the cost changes between the alternatives it is relevant cost and if cost remain same in various alternatives it is classified as irrelevant cost.

Indicating whether each cost would be relevant or irrelevant to the decision along with the reasons:-

Sr. No.	Item	Relevant / Irrelevant	Reason	Relevant / Irrelevant	Reason
a.	Sales Revenue	Relevant	Sales volume will increase their by increasing overall sales of the company with the introduction of new machine Model B300. Further change in sales will be important factor for decision making.	Irrelevant	Old model B100 is not the constraint, hence sales will remain same in both option.
b.	Direct materials	Relevant	Change in volume of sales directly affects the direct material cost in proportion.	Relevant	Replacement of Model B100 with model B300 will result in savings in direct material, hence relevant.
c.	Direct labor	Relevant	Direct Labor will change in proportion to change in volume of sales, hence relevant.	Irrelevant	Labor cost will remain same in both option, hence irrelevant.
d.	Variable manufacturing overhead	Relevant	Variable manufacturing overhead cost will change in proportion to change in volume of sales, hence relevant.	Irrelevant	Variable Manufacturing overhead cost will remain same in both option, hence irrelevant.
e.	Depreciation Model B100 machine	Irrelevant	Depreciation on model B100 is a sunk cost and does not affect the decision making.	Irrelevant	Depreciation on model B100 is a sunk cost and does not affect the decision making.
f.	Book value-Model B100 machine	Irrelevant	Book value of Model B100 is a sunk cost and hence it is irrelevant.	Irrelevant	Book value of Model B100 is a sunk cost and hence it is irrelevant.
g.	Disposal value-Model B100 machine	Irrelevant	In this case, Model B100 will not be sold or discarded to buy Model B300. In fact Model B300 will be added to increase the capacity.	Relevant	Model B100 will be sold and Model B300 will be replaced with, disposal value of Model B100, will change the cash flow arising from the decision.
h.	Market value-Model B300 machine(cost)	Relevant	It is the purchase price of the machine, hence it is relevant for decision making.	Relevant	It is the purchase price of the machine, hence it is relevant for decision making.
i.	fixed manufacturing overhead (general)	Irrelevant	As specified in the question, fixed manufacturing cost will not change due to introduction of new machine, hence irrelevant.	Irrelevant	This cost will remain same in both options, hence irrelevant.
j.	Variable selling expense	Relevant	Variable selling expense will increase proportionately with increase in volume, hence relevant.	Irrelevant	This cost will remain same in both options, hence irrelevant.
k.	Fixed selling expense	Relevant	As specified in the question, fixed selling cost will increase due to increase in volume of sales, hence relevant.	Irrelevant	This cost will remain same in both options, hence irrelevant.
l.	General administrative overhead	Relevant	As specified in the question, general administrative overhead cost will increase due to increase in volume of sales, hence relevant.	Irrelevant	This cost will remain same in both options, hence irrelevant.