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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.
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:
Copy the information below onto your answer sheet and place an X in the appropriate column to indicate whether each item is relevant or irrelevant to the decision context described in Case A and Case B
Sales revenue
Direct Materials
Direct Labor
VMA
Depreciattion Model B100
Book Value Model B100
Disposal value B100
Market Value B300
FMO
Variable selling expense
Fixed selling expense
General administration overhead
Relevance of Information to Decision ContextsItem Case A: Expansion (Relevant/Irrelevant) Case B: Replacement (Relevant/Irrelevant)Sales revenue Relevant IrrelevantDirect Materials Relevant RelevantDirect Labor Relevant IrrelevantVMA (Variable Manufacturing Amount) Relevant RelevantDepreciation Model B100 Relevant RelevantBook Value Model B100 Relevant RelevantDisposal Value Model B100 Irrelevant RelevantMarket Value Model B300 Irrelevant RelevantFMO (Fixed Manufacturing Overhead) Irrelevant IrrelevantVariable Selling Expense Relevant IrrelevantFixed Selling Expense Relevant IrrelevantGeneral Administration Overhead Relevant IrrelevantCase A: Expansion:For expanding production, things like direct materials, labor, VMA, depreciation, and the value of Model B100 matter. Sales and variable selling costs rise with more sales, but fixed expenses like FMO, administration costs, and Model B100's disposal value don't shift much.Case B: Replacement: To assess cost savings via reduced waste, consider direct materials, depreciation, book value, disposal, and market value of Model B300. Sales and additional expenses don't matter since they're not likely to alter in this decision.The Complete QuestionSvahn, 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:Copy the information below onto your answer sheet and place an X in the appropriate column to indicate whether each item is relevant or irrelevant to the decision context described in Case A and Case BSales revenueDirect MaterialsDirect LaborVMADepreciattion Model B100Book Value Model B100Disposal value B100Market Value B300FMOVariable selling expenseFixed selling expenseGeneral administration overhead...