Question

Question C.1 (12 Marks) Define relevant costs. Why are historical costs irrelevant? a. b. Distinguish between quantitative and qualitative factors in decision making. Why are qualitative factors important in decision making? Sunny Inc. produces 40 000 MP3 Players each month. The market price per MP3 Player is $40. The following data is relevant to MP3 Players' production and sales in November 2018 c. Direct material costs S389 870 Direct labor costs S265 900 Variable manufacturing overhead costs S224 230 Variable operating cost per MP3 Play $3.40 er Fixed manufacturing costs per MP3 Player $6.8 Fixed marketing and administrative costs $98 000 Sunny Inc. has a monthly production capacity of 50 000 MP3 Players. Fast Electronics offered to buy 8 000 MP3 Players, one-time-only special-order, from Sunny Inc. at $25 each. Required Show the comparative Contribution Income Statements for November 2018- 'Operating profit without special order' and 'Operating profit with the special order. On the basis of financial considerations alone, should Sunny Inc. accept the one-time-only special-order from Fast Electronics?

Answer 1

Answer
1) Relevant cost
The cost that affect the management decision process is term as relevant cost. A relevant cost is any cost that will be different among various alternatives. Decisions apply to future, relevant costs are the future costs rather than the historical costs. Relevant costs are also referred to as differential costs. They differ among different alternatives. They are expected future costs and relevant to decision making. Major relevant cost are Incremental cost, future cost, opportunity cost . Why are historical cost irrelevant ? Historical cost means a cost which is already incurred. Also know as sunk cost. This cost is not useful for decision making to the management. Irrelevant or sunk costs are to be ignored when deciding on a future course of action.
2 ) Quantitative and Qualitative factors in Decision making and Importance of qualitative factors in decision making
Input Data : qualitative methods rely on information that is not easily measurable while quantitative methods deal with data
Financial Output : On the basis of quantitative data decision taken is a financial outcome while qualitative data does not consider financial figures
Importance of qualitatives factors
Decisions based in part on qualitative factors are relevant, even though you can’t tie specific cost or revenue numbers to them. They can have a long-term impact on profitability. Although accountants are responsible for providing relevant and objective financial information to help managers make decisions, qualitative factors also play a significant role in the decision-making process.
3. Compartive contribution statement for the month of Nov. 2018
	( In $)	( In $)
Particulars	Without special order	With special order
Sales
(40000* 40$)	16,00,000.00	2,00,000.00
Expenses
Direct material cost (389870/50000)= per unit cost- 7.7974	3,11,896.00	62,379.20
Direct labour cost ( 265900/50000) per unit cost - 5.318	2,12,720.00	42,544.00
Variable manufacturing o/h cost (224230/50000) per unit cost = 4.4846	1,79,384.00	35,876.80
Variable operating cost per unit = 3.40	1,36,000.00	27,200.00
Fixed manufacturing cost per unit 6.8	2,72,000.00	-
Other fixed cost	98,000.00	-
	12,10,000.00	1,68,000.00
Operating profit/ (Loss)	3,90,000.00	32,000.00
Yes sunny Inc should accept the special offer from fast electonic.
Note: When the company is operating at less than its maximum capacity and the company has enough capacity to produce and fill the special order, the order should be accepted if the additional sales exceed the additional variable costs. Fixed costs remain constant regardless of the level of activity.