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. Sales revenue
b. Direct materials
c. Direct labor
d. Variable manufacturing overhead
e. Depreciation—Model B100 machine
f. Book value—ModeI B100 machine
g. Disposal value—ModeI B100 machine
h. Market value—ModeI B300 machine (cost)
i. Fixed manufacturing overhead (general)
j. Variable selling expense
k. Fixed selling expense
l. General administrative overhead

Answer 1

A. Sales Revenue ( Case 1 Relevant) ( Case 2 Not Relevant)

B. Direct Materials: ( Case 1 Relevant) ( Case 2 Relevant)

C. Direct Labor: ( Case 1Relevant) ( Case 2 Not Relevant)

D.Variable Manufacturing Overhead: ( Case 1Relevant) ( Case 2 Not Relevant)

E. Depreciation-Model B100 Machine:

( Case 1 Not Relevant ) ( Case 2 Not Relevant)

F.Book Value-Model B100 Machine:

( Case 1 Not Relevant ) ( Case 2 Not Relevant)

G.Disposal Value-Model B100 Machine: ( Case 1Not Relevant ) (Case 2 Relevant)

H.Market Value-Model B300 Machine (cost): (Case 1 Relevant) ( Case 2 Relevant)

I. Fixed Manufacturing Overhead (general): ( Case 1 Not Relevant) (Case 2 Not Relevant)

J.Variable Selling Expense: (Case 1Relevant) (Case 2 Not Relevant)

K.Fixed Selling Expense: ( Case 1Relevant) (Case 2 Not Relevant)

L.General Administrative Overhead: (Case 1Relevant)(Case 2 Not Relevant)

Step-by-step explanation:

Relevant means something that important

on to make a difference to the external decision makers who use financial reports

while Not Relevant means something that is not important .