Question

A number of costs are listed below that may be relevant in decisions faced by the management of Svahn, AB, a Swedish manufacturer of sailing yachts:

Consider the following two cases independently.

Case 1:

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 2:

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:

Indicate whether each item is relevant or not relevant in the following situations.

A number of costs are listed below that may be relevant in decisions faced by the management of Svahn, AB, a Swedish manufacturer of sailing yachts:

Consider the following two cases independently.

Case 1:

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 2:

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:

Indicate whether each item is relevant or not relevant in the following situations.

Item Case 1 Case 2

A. Sales Revenue

B.Direct Materials

C.Direct Labor

D. Variable Manufacturing overhead

e.DepreicationModel B100 machine

F. Book Value-Model B100 machine

G. Disposal Value -Model B100 Machine

H. Market Value 0 Model B300 machine (cost)

I. Fixed Manufacturing overhead. (General)

J. Variable selling expense

K.Fixed Selling Expense

I. General Admministrative Overhead

Answer 1

Item	Case 1	Case 2
A. Sales Revenue	Relevant because new machine will increase sales of company.	Not relevant because new machine will have no effect on production or sales.
B.Direct Materials	Not relevant because new machine will have no effect on direct material.	Relevant because new machine will make potential savings in direct materials.
C.Direct Labor	Not relevant because direct labour is not a matter of discussion.	Not relevant because direct labour is not a matter of discussion.
D. Variable Manufacturing overhead	Not relevant because Variable Manufacturing overhead is not a matter of discussion.	Not relevant because Variable Manufacturing overhead is not a matter of discussion.
e.DepreicationModel B100 machine	Relevant because the Model B100 machine will continue to be used.	Not relevant because the Model B100 machine would be sold.
F. Book Value-Model B100 machine	Relevant because the Model B100 machine will continue to be used.	Not relevant because the Model B100 machine would be sold.
G. Disposal Value -Model B100 Machine	Not relevant because the Model B100 machine will continue to be used.	Relevant because the Model B100 machine would be sold.
H. Market Value of Model B300 machine (cost)	Relevant because Management is considering purchasing a Model B300 machine.	Relevant because management is considering replacing it with a new Model B300 machine.
I. Fixed Manufacturing overhead. (General)	Not relevant because it does not effect.	Not relevant because it does not effect.
J. Variable selling expense	Not relevant because it does not effect.	Not relevant because it does not effect.
K.Fixed Selling Expense	Relevant because new machine will increases the fixed selling expenses.	Not relevant because it does not effect.
I. General Admministrative Overhead	Relevant because new machine will increases the General Admministrative Overhead.	Not relevant because it does not effect.