University of Maryland BMGT 321 CHAPTER 11 Homework Solutions

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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 [Show More]

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