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Managerial Accounting For Managers Noreen 3rd Edition Solutions Manual
Managerial Accounting For Managers Noreen 3rd Edition Solutions Manual
Solutions to Questions
7-1 A relevant cost is a cost that differs in as a result of dropping the product is less than
total between the alternatives in a decision. the fixed costs that would be avoided. Even in
that situation the product may be retained if it
7-2 An incremental cost (or benefit) is the promotes the sale of other products.
change in cost (or benefit) that will result from
some proposed action. An opportunity cost is 7-9 Allocations of common fixed costs can
the benefit that is lost or sacrificed when make a product (or other segment) appear to be
rejecting some course of action. A sunk cost is a unprofitable, whereas in fact it may be
cost that has already been incurred and that profitable.
cannot be changed by any future decision.
7-10 If a company decides to make a part
7-3 No. Variable costs are relevant costs internally rather than to buy it from an outside
only if they differ in total between the supplier, then a portion of the company’s
alternatives under consideration. facilities have to be used to make the part. The
company’s opportunity cost is measured by the
7-4 No. Not all fixed costs are sunk—only benefits that could be derived from the best
those for which the cost has already been alternative use of the facilities.
irrevocably incurred. A variable cost can be a
sunk cost if it has already been incurred. 7-11 Any resource that is required to make
products and get them into the hands of
7-5 No. A variable cost is a cost that varies customers could be a constraint. Some examples
in total amount in direct proportion to changes are machine time, direct labor time, floor space,
in the level of activity. A differential cost is the raw materials, investment capital, supervisory
difference in cost between two alternatives. If time, and storage space. While not covered in
the level of activity is the same for the two the text, constraints can also be intangible and
alternatives, a variable cost will not be affected often take the form of a formal or informal
and it will be irrelevant. policy that prevents the organization from
furthering its goals.
7-6 No. Only those future costs that differ
between the alternatives are relevant. 7-12 Assuming that fixed costs are not
affected, profits are maximized when the total
7-7 Only those costs that would be avoided contribution margin is maximized. A company
as a result of dropping the product line are can maximize its total contribution margin by
relevant in the decision. Costs that will not be focusing on the products with the greatest
affected by the decision are irrelevant. amount of contribution margin per unit of the
constrained resource.
7-8 Not necessarily. An apparent loss may
be the result of allocated common costs or of 7-13 Joint products are two or more products
sunk costs that cannot be avoided if the product that are produced from a common input. Joint
is dropped. A product should be discontinued costs are the costs that are incurred up to the
only if the contribution margin that will be lost split-off point. The split-off point is the point in
Case 1 Case 2
Not Not
Item Relevant Relevant Relevant Relevant
a. Sales revenue ................. X X
b. Direct materials .............. X X
c. Direct labor .................... X X
d. Variable manufacturing
overhead ..................... X X
e. Book value—Model
A3000 machine ............ X X
f. Disposal value—Model
A3000 machine ............ X X
g. Depreciation—Model
A3000 machine ............ X X
h. Market value—Model
B3800 machine (cost) ... X X
i. Fixed manufacturing
overhead ..................... X X
j. Variable selling expense .. X X
k. Fixed selling expense ...... X X
l. General administrative
overhead ..................... X X
Depreciation on the van is a sunk cost and the van has no salvage value
since it would be donated to another organization. The general
administrative overhead is allocated and none of it would be avoided if
the program were dropped; thus it is not relevant to the decision.
The same result can be obtained with the alternative analysis below:
Difference:
Net
Total If Operating
House- Income
Current keeping Is Increase or
Total Dropped (Decrease)
Revenues .................................... $900,000 $660,000 $(240,000)
Variable expenses........................ 490,000 330,000 160,000
Contribution margin..................... 410,000 330,000 (80,000)
Fixed expenses:
Depreciation* ........................... 68,000 68,000 0
Liability insurance ..................... 42,000 27,000 15,000
Program administrators’ salaries 115,000 78,000 37,000
General administrative overhead 180,000 180,000 0
Total fixed expenses .................... 405,000 353,000 52,000
Net operating income (loss) ......... $ 5,000 $(23,000) $ (28,000)
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