PROBLEMS P7.1 You are planning to purchase a range and have to make a choice among the following three models of the same type of equipment: Model 1 Model 3 $ 5,300 $ 5,000 5 years 5 years Cash cost Estimate life Trade-in value at end of life Cash from sale of old machine Installation of new machine Initial training cost in Year 1 Annual maintenance contract Annual cost of supplies Annual wage costs of employees $ 1.000 $ 200 S 80 S 350 $ 275 $ 175 $32,000 Model 2 $ 5,500 5 years S 1.200 S 200 S 120 S 300 S 300 $ 225 $32,000 s 800 $ 200 $ 100 S 325 S 250 $ 200 $32,000 324 CHAPTER 7 COST MANAGEMENT Using the concept of relevant costs over the five-year period, which model would be the best investment? (Note: In your calculations, ignore any costs that are not relevant.) Problem 73 10 otv P7.3 You have the following annual information about a restaurant complex consisting of three departments: Contributory Dining Coffee Income Statement Room Shop Lounge Total Sales revenue $194,800 $135,800 $152,800 $483,400 Direct costs ( 154,400) (128,000 (124.600 (407.000 Contributory income $ 40,400 $ 7,800 $ 28,200 $ 76,400 Indirect costs (52,000) Operating income $ 24,400 The owner wants to allocate indirect costs quarterly to each department based on square footage to get a better picture of how each department is doing. Dining room Coffee shop Lounge 2,200 sq. ft. 840 sq. ft. 960 sq. ft. a. Allocate the indirect costs as indicated. b. The owner has an offer from the souvenir store operator who is will ing to rent the coffee shop space for $9,600 a year. Advise the owner whether to accept the offer. C. Before making a final decision, the owner of the restaurant decides to evaluate the changes to indirect costs if the coffee shop space is rented. Indirect Costs Administrative and general Advertising and promotion Utilities Repairs and maintenance Insurance Interest Depreciation Present Costs $14,100 9,800 4,500 4,200 3,600 5,400 10,400 Costs if Coffee Shop Rented $13,200 9,000 4,100 3,800 3,100 5,400 7,100 If the coffee shop is not operated, it is estimated that lounge sales rev. enue will decline by $11.700 a year and lounge direct costs will go down by $8,100. Dining room sales revenue and direct costs will not be af- fected. Should the owner accept the offer to rent out the coffee shop? Professor's note for parts b and c. When you think about parts and cremember that the Indirect Costs, $52,000, does NOT change if we rent out the coffee shop. Indirect costs are Overhead and not directly tied to the operation of the restaurant, coffee shop, or lounge
