University of Maryland BMGT 321 CHAPTER 11 Homework Solutions
13 views 0 purchase
Course
BMGT 321
Institution
University Of Maryland
CHAPTER 11
DECISION MAKING AND RELEVANT INFORMATION
11-16 Disposal of assets.
Answer the following questions.
1. A company has an inventory of 1,250 assorted parts for a line of missiles that has been
discontinued. The inventory cost is $76,000. The parts can be either (a) remachined at total
...
chapter 11 decision making and relevant information 11 16 disposal of assets answer the following questions 1 a company has an inventory of 1
250 assorted parts for a line of missiles that has been
Written for
University Of Maryland
BMGT 321
All documents for this subject (1)
Seller
Follow
Themanehoppe
Reviews received
Content preview
CHAPTER 11
DECISION MAKING AND RELEVANT INFORMATION
11-16 Disposal of assets.
Answer the following questions.
1. A company has an inventory of 1,250 assorted parts for a line of missiles that has been
discontinued. The inventory cost is $76,000. The parts can be either (a) remachined at total
additional costs of $26,500 and then sold for $33,500 or (b) sold as scrap for $2,500. Which
action is more profitable? Show your calculations.
2. A truck, costing $100,500 and uninsured, is wrecked its first day in use. It can be either (a)
disposed of for $18,000 cash and replaced with a similar truck costing $103,000 or (b) rebuilt
for $88,500 and thus be brand-new as far as operating characteristics and looks are
concerned. Which action is less costly? Show your calculations.
SOLUTION
1. This is an unfortunate situation, yet the $76,000 costs are irrelevant regarding the
decision to remachine or scrap. The only relevant factors are the future revenues and future costs.
By ignoring the accumulated costs and deciding on the basis of expected future costs, operating
income will be maximized (or losses minimized). The difference in favor of remachining is
$4,500:
(a) (b)
Remachine Scrap
Future revenues $33,500 $2,500
Deduct future costs 26,500 –
Operating income $ 7,000 $2,500
Difference in favor of remachining $4,500
2. This, too, is an unfortunate situation. But the $101,500 original cost is irrelevant to this
decision. The difference in relevant costs in favor of replacing is $3,500 as follows:
(a) (b)
Replace Rebuild
New truck $103,000 –
Deduct current disposal
price of existing truck 18,000 –
Rebuild existing truck – $88,500
$ 85,000 $88,500
Difference in favor of replacing $3,500
Note, here, that the current disposal price of $18,000 is relevant, but the original cost (or book
value, if the truck were not brand new) is irrelevant.
,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:
LN Manufacturing uses straight-line depreciation. Ignore the time value of money and
income taxes. Should LN Manufacturing replace the old machine? Explain.
DeCesare Computers should reject Peach’s offer. The $80 of fixed costs is irrelevant because it
will be incurred regardless of this decision. When comparing relevant costs between the choices,
Peach’s offer price is higher than the cost to continue to produce.
2.
Keep Replace Difference
Cash operating costs (3 years) $52,500 $46,500 $6,000
Current disposal value of old machine (2,200) 2,200
Cost of new machine _ _____ 9,000 (9,000)
Total relevant costs $52,500 $53,300 $ (800)
LN Manufacturing should keep the old machine. The cost savings are less than the cost to
purchase the new machine.
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller Themanehoppe. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $17.49. You're not tied to anything after your purchase.
