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: Copy the information below onto your answer sheet and place an X in the appropriate column to indicate whether each item is relevant or irrelevant to the decision context described in Case A and Case B.

Answer 1

Relevant Cost - The Relevant cost are those cost which are relevant and are necessary to incurred while we opt a decision and this cost can be avoided if dont opt for that decison.

Irrelevant cost - Irrelevant Cost are those cost which are sunk cost and have already been incurred and which does not affect our decison making. this cost are incurred whether we opt a option are not .

In the above problem based on Case 1 and Case 2 we can find following cost as relevant or irrelvant;

Table showing Relevant and Irrelevant Cost
No	Items	Case 1`		Case 2
		Relevant	Irrelevant	relevant	irrelevant
1	Sales	X			X
2	Direct Material	X		X
3	Direct Labour	X			X
4	Variable Manuf. Overhead	X			X
5	Deprecation on B100		X		X
6	Book Value B100		X		X
7	Disposal value B100		X	X
8	Market Value B300	X		X
9	Fixed Manuf. Overhead		X		X
10	Variable Selling Overhead	X			X
11	Fixed Selling Overhead	X			X
12	General administrative overhead	X			X