Relevant or Irrelevant
This cost cannot be changed and is therefore always irrelevant.
Answer: What is a sunk cost?
This cost is usually irrelevant if excess capacity exists.
Answer: What is fixed manufacturing overhead?
This cost disappears if production stops.
Answer: What is avoidable cost?
Joint costs are this type of cost.
Answer: What are sunk costs?
This value of old equipment is irrelevant.
Answer: What is book value?
This determines whether segment should be eliminated.
Answer: What is contribution margin?
This cost represents the benefit lost when choosing one alternative over another.
Answer: What is opportunity cost?
Special orders should be accepted if this is positive.
Answer: What is incremental profit?
Purchase price per unit = $7
Make cost per unit = $9
Best decision?
Answer: What is buy?
Process further if incremental revenue is greater than this.
Answer: What are incremental costs?
This value of old equipment is relevant.
Answer: What is sale value?
If fixed costs cannot be eliminated, they are this.
Answer: What are irrelevant?
The book value of existing equipment is this type of cost.
Answer: What is a sunk cost?
Variable cost = $10
Special price = $14
Units = 1,000
Incremental profit = ?
Answer: What is $4,000?
Total avoidable cost = $50,000
Purchase cost = $48,000
Decision?
Answer: What is buy?
Sell price = $30
Process further price = $38
Extra cost = $5
Decision?
Profit increase = $3
Answer: What is process further?
Old machine operating cost = $100,000
New machine cost = $70,000
Savings?
Answer: What is $30,000?
Segment contribution margin = $50,000
Avoidable fixed costs = $40,000
Decision?
Income decreases $10,000
Answer: What is do NOT eliminate?
True or False:
Book value is relevant.
False
These costs remain the same between alternatives and should be ignored.
Answer: What are irrelevant costs?
Variable cost = $18
Special price = $20
Shipping cost = $3
Incremental profit per unit = ?
Answer: What is negative $1?
Reject order.
Opportunity income from alternative use = $20,000
This makes which option more attractive?
Answer: What is buying?
Sell price = $50
Process price = $60
Extra cost = $15
Decision?
Profit decrease = $5
Answer: What is sell now?
Old machine sale value = $10,000
New machine cost = $50,000
Net investment = ?
Answer: What is $40,000?
Segment loss = $10,000
Avoidable fixed costs = $20,000
Decision?
Income increases $10,000
Answer: What is eliminate segment?
Opportunity cost is relevant.
True
This type of cost is only relevant if it changes between alternatives.
Answer: What are future costs?
Why might a company reject a profitable special order?
Answer: What is negative impact on regular sales?
Which costs are ALWAYS relevant in make-or-buy?
Answer: What are opportunity costs, avoidable fixed costs, and variable costs?
Why are joint costs irrelevant?
Answer: What is because they cannot be changed?
What is the decision rule for replacement?
Answer: What is replace if cost savings exceed replacement cost?
Key formula for elimination decision?
Answer: What is avoidable fixed costs minus contribution margin?
Variable cost = $12
Fixed cost per unit = $8
Special order price = $15
Units = 5,000
Capacity available
Should company accept special order and why?
Incremental revenue = 75,000
Incremental cost = 60,000
Profit increase = 15,000
Accept order because fixed costs are irrelevant.
Joint costs are relevant.
False