Question

1.

Keating Co. is considering disposing of equipment with a cost of $67,000 and accumulated depreciation of $46,900. Keating Co. can sell the equipment through a broker for $35,000, less a 9% broker commission. Alternatively, Gunner Co. has offered to lease the equipment for five years for a total of $47,000. Keating will incur repair, insurance, and property tax expenses estimated at $8,000 over the five-year period. At lease-end, the equipment is expected to have no residual value. The net differential income from the lease alternative is

a.$7,150

b.$5,005

c.$10,725

d.$8,580

2.

Use this information for Stryker Industries to answer the question that follow.

Stryker Industries received an offer from an exporter for 21,000 units of product at $17 per unit. The acceptance of the offer will not affect normal production or domestic sales prices. The following data are available:

Domestic unit sales price	$23
Unit manufacturing costs:
Variable	10
Fixed	4

What is the amount of income or loss from the acceptance of the offer?

a.$483,000 loss

b.$210,000 loss

c.$147,000 income

d.$357,000 income

Answer 1

1. Answer: a. $7150

Explanation:

Cost of Asset=67000, Accumulated Depreciation= 46900, Carrying amount/WDV=67000-46900=20100

Option 1. Sell througha broker:

Selling Price= 35000

Less: Commission= 35000x9%=3150

Net Selling Price= 31850

Option 2. Lease the asset

Cash Inflow= 47000

Cash Outflow= 8000

Net Income= 39000

The net differential income from the lease alternative =39000-31850=7150

2. Answer: c. $147000, income

Explanation: Selling Price= $17 per unit

Less:Variable Cost/ Relevant cost= $10 per unit

Net benefit from offer= 17-10=$7 per unit on 21000 unikts

Income from acceptance of offer= 21000x7=147000

Fixed costs are sunk costs and hence not relevant in decision making because fixed costs continue to occur ireespective of the decision to accept or reject the new offer.