EXERCISE $10-1$ Identifying Relevant Costs $[$LO$10-1]$

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:

Case $1$

Not

Relevant

Relevant

Relevant

Not

Item

a$.$ Sales revenue.

b$.$ Direct materials.

c$.$ Direct labor

d$.$ Variable manufacturing overhead.

e$.$ Depreciation$-$Model B$100$ machine

f$.$ Book value$-$Model B$100$ machine.

g$.$ Disposal value$-$Model B$100$ machine.

h$.$ Market value$-$Model B$300$ machine $($cost$)...$

i$.$ Fixed manufacturing overhead $($general$)$

j$.$ Variable selling expense.

k$.$ Fixed selling expense.

L$.$ General administrative overhead

Chapter $10$

Required:

Copy the information above onto your answer sheet and place an $x$ in the appropriate column to indicate whether each item is relevant or not relevant in the following situations. Requirement $1$ relates to Case $1$ above, and requirement $2$ relates to Case $2.$

The company chronically has no idle capacity and the old Model B$100$ machine is the company's constraint. Management is considering purchasing a Model B$300$ machine to use in addition to the company's present Model B$100$ machine. The old Model B$100$ machine will continue to be used to capacity as before, with the new Model B$300$ 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 owerhead, but not in the fixed manufacturing owerhead.

The old Model B$100$ machine is not the company's constraint, but management is considering replacing it with a new Model B$300$ machine because of the potential savings in direct materials with the new machine. The Model B $100$ 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.