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
Sales revenue
Direct Materials
Direct Labor
VMA
Depreciattion Model B100
Book Value Model B100
Disposal value B100
Market Value B300
FMO
Variable selling expense
Fixed selling expense
General administration overhead

Answer 1

Items such as sales revenue, direct materials, and fixed selling expense are relevant to Case A where Svahn, AB looks to expand production. In Case B, where the old machine is replaced for better material efficiency without affecting production volume, direct materials' savings are relevant.

Step-by-step explanation:

Cost Decision Relevance in Different Scenarios

In both Case A and Case B, Svahn, AB, is evaluating decisions involving its production machinery, which affect expenses and the cost-benefit of different actions. The relevance of various costs requires examination depending on the case context.

• 
  
• Sales revenue - Relevant in Case A (expanding production will impact sales), Irrelevant in Case B (no effect on production or sales).
• 
  
• Direct Materials - Relevant in both cases (material savings in Case B, increased volume in Case A).
• 
  
• Direct Labor - Potentially relevant in both cases if labor needs change with machine changes.
• 
  
• FMO (Fixed Manufacturing Overhead) - Irrelevant in Case A (no change mentioned), possibly relevant in Case B if overhead changes with new machine.
• 
  
• Variable selling expense - Relevant in Case A (varies with increased production), Irrelevant in Case B (no sales change).
• 
  
• Fixed selling expense - Relevant in Case A (increase due to increased production), Irrelevant in Case B (no effect on production or sales).
• 
  
• General Administration Overhead - Relevant in Case A (would increase with increased production), likely irrelevant in Case B (unless administrative costs change due to the new machine).

Items like book value and disposal value of the B100, and the market value of B300, would often be relevant as these pertain to the cost of investment decisions in equipment. However, without specifics on how these values impact the cases, precise relevance cannot be determined.

Answer 2

Relevance of Information to Decision Contexts

Item Case A: Expansion (Relevant/Irrelevant) Case B: Replacement (Relevant/Irrelevant)

Sales revenue Relevant Irrelevant

Direct Materials Relevant Relevant

Direct Labor Relevant Irrelevant

VMA (Variable Manufacturing Amount) Relevant Relevant

Depreciation Model B100 Relevant Relevant

Book Value Model B100 Relevant Relevant

Disposal Value Model B100 Irrelevant Relevant

Market Value Model B300 Irrelevant Relevant

FMO (Fixed Manufacturing Overhead) Irrelevant Irrelevant

Variable Selling Expense Relevant Irrelevant

Fixed Selling Expense Relevant Irrelevant

General Administration Overhead Relevant Irrelevant

Case A: Expansion:

For expanding production, things like direct materials, labor, VMA, depreciation, and the value of Model B100 matter. Sales and variable selling costs rise with more sales, but fixed expenses like FMO, administration costs, and Model B100's disposal value don't shift much.

Case B: Replacement: To assess cost savings via reduced waste, consider direct materials, depreciation, book value, disposal, and market value of Model B300. Sales and additional expenses don't matter since they're not likely to alter in this decision.

The Complete 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

Sales revenue

Direct Materials

Direct Labor

VMA

Depreciattion Model B100

Book Value Model B100

Disposal value B100

Market Value B300

FMO

Variable selling expense

Fixed selling expense

General administration overhead