Question

Halley Company has just received a special order for 1,000 deck chairs. Halley has sufficient idle capacity to accept the order. Indicate whether the given cost is a sunk cost, opportunity cost, relevant or not relevant to the decision to accept the special order, variable or fixed cost. CHOOSE ALL THAT APPLY. You have MORE THAN ONE answer for all questions. For these questions consider variable cost as a cost that varies with the number of chairs that Halley makes.

Answer 1

1. Raw materials to make 1,000 deck chairs - RELEVANT VARIABLE COST

2. Depreciation on equipment that will be used to make chairs - NOT RELEVANT FIXED COST

3. Revenue that could be earned if special order is not accepted - OPPORTUNITY COST, RELEVANT TO THE DECISION

4. Salary of the production department manager (department that will make the chairs) - NOT RELEVANT FIXED COST

5.Equipment set-up costs incurred to make the chairs - RELEVANT VARIABLE COST

6. Company president's salary - NOT RELEVANT FIXED COST

7. Material's handling cost - RELEVANT VARIABLE COST, AS MORE CHAIRS ARE MADE THIS COST INCREASES

8. Effect of accepting the order on Company's reputation - RELEVANT TO THE DECISION

9. Engineering design costs incurred when chair's design was first developed - SUNK COST, NOT RELEVANT TO THE DECISION

10. Engineering design costs incurred to customize the chairs to customers' specifications - RELEVANT VARIABLE COST, IF THE CHAIRS AREN'T MADE, THIS COST WILL NOT EXIST

11. Direct labor costs to make 1,000 chairs - RELEVANT VARIABLE COST

12. Maintenance on the equipment that would have been performed during the idle time if the order had not been accepted - OPPORTUNITY COST, RELEVANT TO THE DECISION SINCE THE MAINTENANCE WILL HAVE TO BE PERFORMED LATER

13. manager's estimates of revenue that may be generated from this customer in the future if the special order is accepted - RELEVANT TO THE DECISION

Answer 2

The costs are relevant cost and fixed costs.

Step-by-step explanation:

Halley Company has just received a special order for 1,000 deck chairs. Halley has sufficient idle capacity to accept the order. Indicate whether the given cost is a sunk cost, opportunity cost, relevant or not relevant to the decision to accept the special order, variable or fixed costs. For these questions, consider variable cost as a cost that varies with the number of chairs that Halley makes.

The above is the question to be tackled. Here, the given costs for Halley Company are the Relevant costs and the Fixed costs. What is a relevant cost? A relevant cost is a cost used in management accounting which refers to the avoidable costs incurred when making very specific business decisions. A business management team uses relevant cost to make decisions for the business. It is also used to determine whether to accept a customer's last minute special order. In this case, Halley company will have to use the relevant cost in order to make this decision.

Fixed costs refers to costs that do not increase or decrease with the level of activity. These costs stay the same whether there was an increase or not. These costs are either long-term or short-term liabilities. Fixed costs are mostly associated with idle capacity because the costs incurred during idle time are fixed costs and depreciation. In Halley company's case, they can produce the preordered chairs using their idle time.