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Question(s) / Instruction(s):

A number of costs are listed in the table that may be relevant in decisions faced by the management of Poulsen & Sonner A/S, a Danish furniture manufacturer:

 Requirement 1 relates to Case 1, and requirement 2 relates to Case 2. Consider the two cases independently.

1.            The company chronically runs at capacity and the old Model A3000 machine is the company’s constraint. Management is considering the purchase of a new Model B3800 machine to use in addition to the company’s present Model A3000 machine. The old Model A3000 machine will continue to be used to capacity as before, with the new Model B3800 being used to expand production. The increase in volume will be large enough to require increases in fixed selling expenses and in general administrative overhead, but not in the general fixed manufacturing overhead..

2.            The old Model A3000 machine is not the company’s constraint, but management is considering replacing it with a new Model B3800 machine because of the potential savings in direct materials cost with the new machine. The Model A3000 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:

Indicate whether each item is relevant or not relevant in the above situations.

 

                Item      Case 1   Case 2

  a.            Sales revenue

  b.            Direct materials

  c.             Direct labor

  d.            Variable manufacturing overhead

  e.            Book value—Model A3000 machine

  f.             Disposal value—Model A3000 machine

  g.            Depreciation—Model A3000 machine 

  h.            Market value—Model B3800 machine (cost)

 i.               Fixed manufacturing overhead (general)

  j.             Variable selling expense.

  k.            Fixed selling expense

  l.              General administrative overhead

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