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In: Accounting

Hart Company sells and delivers office furniture across Western Canada. The costs associated with the acquisition...

Hart Company sells and delivers office furniture across Western Canada.

The costs associated with the acquisition and annual operation of a delivery truck are given below:

  Insurance$3,593   Licences$205   Taxes (vehicle)$122   Garage rent for parking (per truck)$1,220   Depreciation ($25,500 ÷ 5 years)$5,100   Gasoline, oil, tires, and repairs$0.20/km

3. Assume that the company decides to use the truck during the second year. Near year-end, an order is received from a customer over 1,000 kilometres away. What costs from the previous list are relevant in a decision between using the truck to make the delivery and having the delivery done commercially? (Round your answer to 2 decimal places.)

4. Occasionally, the company could use two trucks at the same time. For this reason, some thought is being given to purchasing a second truck. The total kilometres driven would be the same as if only one truck were owned. What costs from the previous list are relevant to a decision about whether to purchase the second truck?

Solutions

Expert Solution

WHILE TAKING a decision as per marginal costing approach only consider only costs which are relevant but not historical cost, unaviodable cost, sunk cost, common cost etc

Insurance 3,593   sunk cost
Licences 205 it is already incurred, so its is irrelevant
TAXES 122 it has to be paid whether they took this order or not, so it is unavoidable cost, hence it is irrelevant
GARAGE RENT 1220 sunk cost
DEP 5100 unavoidable cost, hence irrelevant
GAS OIL REP 0.2 relevant cost
total cost 400
(to & fro) (.2*2000)
Th

The min . quotation for this order is, $400 as it is relevant cost for this order. in marginal costing only operational costs are relevant , annual costs are sunk costs.

whereas, in case of purchasing of second truck the operational cost is not relevant as there is no change in total kms driven so there wont be any savings from purchasing the second truck.if there is no change in previous cost . it is advisable not to purchase second truck.

ekkarill92 answered 2 years ago
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