Question

Saalfrank Corporation is considering two alternatives that are code-named M and N. Costs associated with the alternatives are listed below:

	Alternative M				Alternative N
Supplies costs	$	82,000			$	69,000
Assembly costs	$	50,000			$	50,000
Power costs	$	30,000			$	45,500
Inspection costs	$	43,000			$	32,000

Required:

a. Which costs are relevant and which are not relevant in the choice between these two alternatives?

b. What is the differential cost between the two alternatives?

	a. Supplies costs Assembly costs Power costs Inspection costs b. Differential cost

Answer 1

a) The costs that are relevant are the ones that change are different for both the projects. as they imply what will be the difference if one alternative is chosen over the other. and the non relevant costs are those which are same for both the alternatives. These are not relevant because there will be no difference in the overall cost because of these.

• Relevant costs:
  • Supplies Cost
  • Power Cost
  • Inspection Cost
• Non Relevant Costs
  • Assembly Costs

b) Differential Cost is the difference in the total costs of both the alternatives. The total differnetial cost is $8,500

	Alternative M	Alternative N	Differential cost
Supplies costs	$       82,000	$      69,000	$      13,000
Assembly costs	$       50,000	$      50,000	$                -
Power costs	$       30,000	$      45,500	$    (15,500)
Inspection costs	$       43,000	$      32,000	$      11,000
Total	$     205,000	$   196,500	$         8,500