E8-16A Determine relevant and irrelevant information (Learning Objective 1)

OConnor Frozen Foods purchased new computer-controlled production machinery last year from Advanced Enterprise. The equipment was purchased for $4.1 million and was paid for with cash. A representative from Advanced Enterprise recently contacted OConnor management because Advanced Enterprise has an even more efficient piece of machinery available. The new design would double the production output of the equipment purchased last year but would cost OConnor another $5.0 million. The old machinery was installed by an engineering firm; the same firm would be required to install the new machinery. Fixed selling costs would not change if the new machinery were to be purchased, but the variable selling cost per unit would decrease. Raw material costs (i.e., food ingredients) would remain the same with either machine. The new machinery would be purchased by signing a note payable at the bank, and interest would be paid monthly on the note payable. Maintenance costs on the new machine would be the same as the maintenance costs on the machinery purchased last year. Advanced Enterprise is offering a trade-in on the machinery purchased last year against the purchase price of the new machinery.

For each of the following costs, indicate whether or not each of the costs described would be relevant to OConnor Frozen Foods decision about whether to purchase the new machinery or not.

Item Relevant Not Relevant a. Book value of old machine b. Added profits from the increase in production resulting from the new machine c. Interest expense on new machine d. Trade-in value of old machine e. Maintenance cost of new machine f. Variable selling costs g. Installation cost of old machine h. Fixed selling costs i. Sales tax paid on old machine j. Cost of the new machine k. Installation cost of new machine l. Cost of the old machine m. Accumulated depreciation on old machine n. Maintenance costs of old machine o. Cost per pound of food to be processed by the machinery