Question

Svahn, AB, is a Swedish manufacturer of sailing yachts. The company has assembled the information shown below that pertains to two independent decision-making contexts.

Case A:

The company chronically has no idle capacity and the old Model B100 machine is the company’s constraint. Management is considering purchasing a Model B300 machine to use in addition to the company’s present Model B100 machine. The old Model B100 machine will continue to be used to capacity as before, with the new Model B300 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 overhead, but not in the fixed manufacturing overhead.

Case B:

The old Model B100 machine is not the company’s constraint, but management is considering replacing it with a new Model B300 machine because of the potential savings in direct materials with the new machine. The Model B100 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.

Required:

Based on the information provided above indicate in the appropriate column whether each item is relevant or irrelevant to the decision context described in Case A and Case B.

	Item	Case A	Case B
a.	Sales revenue
b.	Direct materials
c.	Direct labor
d.	Variable manufacturing overhead
e.	Depreciation—Model B100 machine
f.	Book value—Model B100 machine
g.	Disposal value—Model B100 machine
h.	Market value—Model B300 machine (cost)
i.	Fixed manufacturing overhead (general)
j.	Variable selling expense
k.	Fixed selling expense
l.	General administrative overhead

Answer 1

		Case A	Case B
a	Sales revenue	Relevant	Irrelevant
b	Direct Materials	Relevant	Relevant
c	Direct labor	Relevant	Irrelevant
d	Variable manufacturing overhead	Relevant	Irrelevant
e	Depreciation - Model B100 Machine	Irrelevant	Irrelevant
f	Book value - Model B100 Machine	Irrelevant	Irrelevant
g	Disposal Value - Model B100 Machine	Irrelevant	Relevant
h	Market Value - Model B300 Machine (Cost)	Relevant	Relevant
i	Fixed Manufacturing overhead(general)	Irrelevant	Irrelevant
j	Variable selling expense	Relevant	Irrelevant
k	Fixed selling expense	Relevant	Irrelevant
l	General administrative overhead	Relevant	Irrelevant