Cost Accounting (14th Edition)

insourcing (p. 397)
linear programming (LP) (p. 417)
make-or-buy decisions (p. 397)
objective function (p. 416)
one-time-only special order (p. 394)
opportunity cost (p. 402)
outsourcing (p. 397)
product-mix decisions (p. 405)
qualitative factors (p. 394)
ASSIGNMENT MATERIAL 419
quantitative factors (p. 394)
relevant costs (p. 393)
relevant revenues (p. 393)
sunk costs (p. 393)
Assignment Material
Questions
11-1 Outline the five-step sequence in a decision process.
11-2 Define relevant costs. Why are historical costs irrelevant?
11-3 “All future costs are relevant.” Do you agree? Why?
11-4 Distinguish between quantitative and qualitative factors in decision making.
11-5 Describe two potential problems that should be avoided in relevant-cost analysis.
11-6 “Variable costs are always relevant, and fixed costs are always irrelevant.” Do you agree? Why?
11-7 “A component part should be purchased whenever the purchase price is less than its total manufacturing
cost per unit.” Do you agree? Why?
11-8 Define opportunity cost.
11-9 “Managers should always buy inventory in quantities that result in the lowest purchase cost per
unit.” Do you agree? Why?
11-10 “Management should always maximize sales of the product with the highest contribution margin
per unit.” Do you agree? Why?
11-11 “A branch office or business segment that shows negative operating income should be shut
down.” Do you agree? Explain briefly.
11-12 “Cost written off as depreciation on equipment already purchased is always irrelevant.” Do you
agree? Why?
11-13 “Managers will always choose the alternative that maximizes operating income or minimizes
costs in the decision model.” Do you agree? Why?
11-14 Describe the three steps in solving a linear programming problem.
11-15 How might the optimal solution of a linear programming problem be determined?
Exercises
11-16 Disposal of assets. Answer the following questions.
1. A company has an inventory of 1,100 assorted parts for a line of missiles that has been discontinued. The
inventory cost is $78,000. The parts can be either (a) remachined at total additional costs of $24,500 and then
sold for $33,000 or (b) sold as scrap for $6,500. Which action is more profitable? Show your calculations.
2. A truck, costing $101,000 and uninsured, is wrecked its first day in use. It can be either (a) disposed of
for $17,500 cash and replaced with a similar truck costing $103,500 or (b) rebuilt for $89,500, and thus be
brand-new as far as operating characteristics and looks are concerned. Which action is less costly?
Show your calculations.
11-17 Relevant and irrelevant costs. Answer the following questions.
1. DeCesare Computers makes 5,200 units of a circuit board, CB76 at a cost of $280 each. Variable cost
per unit is $190 and fixed cost per unit is $90. Peach Electronics offers to supply 5,200 units of CB76 for
$260. If DeCesare buys from Peach it will be able to save $10 per unit in fixed costs but continue to incur
the remaining $80 per unit. Should DeCesare accept Peach’s offer? Explain.
2. LN Manufacturing is deciding whether to keep or replace an old machine. It obtains the following
information:
Old Machine New Machine
Original cost $10,700 $9,000
Useful life 10 years 3 years
Current age 7 years 0 years
Remaining useful life 3 years 3 years
Accumulated depreciation $7,490 Not acquired yet
Book value $3,210 Not acquired yet
Current disposal value (in cash) $2,200 Not acquired yet
Terminal disposal value (3 years from now) $0 $0
Annual cash operating costs $17,500 $15,500