Exercise 13-16
The facility-level costs will continue even if the segment is eliminated. Accordingly, these
costs are not avoidable. The original cost, book value and depreciation for the building
avoidance of the real estate taxes. These and other relevant (avoidable) costs are listed below.
Advertising expense
$ 70,000
Supervisory salaries
150,000
Market value of building (opportunity cost)
80,000
Maintenance costs on equipment
56,000
Real estate taxes on building
6,000
Total
$362,000
Exercise 13-17
The original cost and book value of the old truck are not relevant because they are sunk costs.
The relevant costs are shown below:
Decision
Keep
Old
Replace
With New
Cost of the new truck
$26,000
Additional fuel cost (4 x $5,000)
$20,000
-0-
Opportunity cost
12,000
-0-
Total costs
$32,000
$26,000
Exercise 13-18
The original cost and book value of the old machine are different measures of the same
sunk cost and are therefore not relevant. The opportunity cost of using the old machine
years is shown below:
Decision
Keep Old Machine
Purchase New
Machine
Opportunity cost
$ 75,000
Purchase price less salvage
$175,000
Operating costs
270,000
117,000
Total costs
$345,000
$292,000
Since the cost of the new machine is less than the old, the old machine should be replaced.
Exercise 13-19
The opportunity cost of using the existing equipment is its market value less the salvage value
($60,000 – $20,000 = $40,000). If the old equipment is kept, Adam loses the opportunity to
sell it and must pay $120,000 to operate it. These costs can be avoided by replacing the old
equipment and its operating expenses can be avoided by keeping the old equipment.
Accordingly, the avoidable costs are summarized below.
Old
New
Opportunity cost less salvage
$ 40,000
Purchase price less salvage
$105,000
Operating expenses
120,000
80,000
Total
$160,000
$185,000
Since the relevant costs of operating the new equipment are higher, the old equipment should
be retained. Exercise 13-20
If Bach continues to operate the old machine, it loses the opportunity to sell it. Accordingly,
its operating expenses can be avoided if Bach continues to use the old machine. Accordingly,
the avoidable costs are summarized below.
Decision
Keep Old
Buy New
Opportunity cost of old machine
$ 40,000
Purchase price
$150,000
Operating expenses (4 x $50,000)
200,000
Operating expenses (4 x $18,000)
72,000
Total avoidable costs
$240,000
$222,000
Since the costs of operating the new machine are lower, the old machine should be replaced.
Exercise 13-21
a. The original cost and book value are sunk costs that are not relevant. The annual
opportunity cost computed on a straight-line basis is as follows: ($95,000 Current
b. The total lease cost over the four-year contract is $80,000 ($20,000 x 4). Since the
total cost of the lease is less than the total opportunity cost ($95,000 Current market
Problem 13-22
There are many possible answers for each requirement. The following represents a single
example of a correct solution for each part. Students’ answers may differ from the ones
supplied here.
a. Assume unit-level materials cost differs between two alternative products. A portion
of the materials cost would be avoidable with respect to a decision regarding which
b. Assume a special order requires starting a new batch of work. The setup costs could
be avoided by rejecting the special order. In contrast, assume that the special order
c. Suppose advertising cost is incurred for the benefit of a particular store of JCPenney.
The advertising cost could be avoided if the store were closed. In contrast, assume
d. Assume a company pays rent on its manufacturing facility. The rent would be
e. Consider a decision regarding the replacement of old manufacturing equipment with
Problem 13-23
a. With respect to a decision regarding the selection of Job A versus Job B, the
differential revenue and the avoidable costs that differ between the alternatives are
relevant. The allocated facility-sustaining cost is irrelevant because it is incurred to
coverage are not relevant because they do not differ between the alternatives.
Depreciation is a sunk cost and is irrelevant. These costs will be the same regardless
of which alternative is accepted. The relevant information is summarized below:
Decision:
Job A
Job B
Contract price
$900,000
$800,000
Unit-level materials
(250,000)
(220,000)
Unit-level labor
(260,000)
(310,000)
Unit-level overhead
(40,000)
(30,000)
Rental equipment costs
(26,000)
(29,000)
Contribution to profit
$324,000
$211,000
Since Job A provides the higher contribution to profit, it should be accepted.
b. With respect to a decision regarding the acceptance or rejection of Job B standing
alone, changing the decision context changes the items that are considered relevant.
Problem 13-23 (continued)
Decision:
Job B
Contract price
$ 800,000
Unit-level materials
(220,000)
Unit-level labor
(310,000)
Unit-level overhead
(30,000)
Rental equipment costs
(29,000)
Supervisor’s salary
(116,670)
Insurance cost for job
(18,200)
Contribution to profit
$ 76,130
Because the contribution to profit is positive, Job B should be accepted. This problem
Problem 13-24
a. The product-level and facility-level costs are not avoidable because they will be
incurred regardless of whether the special order is accepted. The relevant (avoidable)
costs for 500 blankets are:
Production Cost for 500 Blankets
Materials ($20 per unit x 500)
$10,000
Labor ($18 per unit x 500)
9,000
Manufacturing supplies ($3 x 500)
1,500
Batch-level costs (1 batch at $4,000)
4,000
Total costs
$24,500
Cost per unit = $24,500 ÷ 500 = $49
Problem 13-24 (continued)
b. Since the batch-level costs are fixed relative to the number of units within the relevant
range of 1 to 1,000 units, the avoidable cost per unit will decrease when the number
of units increases from 500 to 1,000. The supporting computations are shown below:
Production Cost for 1,000 Blankets
Materials ($20 per unit x 1,000)
$20,000
Labor ($18 per unit x 1,000)
18,000
Manufacturing supplies ($3 x 1,000)
3,000
Batch-level costs (1 batch at $4,000)
4,000
Total costs
$45,000
Cost per unit = $45,000 ÷ 1,000 = $45
Now the avoidable cost per unit is below the revenue per unit ($47) that will be
c. Levy must exercise caution to avoid alienating its existing customer base. The fact
that a motel operator is outside Levy’s normal marketing channels is a good sign that
existing customers will not be affected. However, if the blankets are marked with an
Levy label, some association between the two markets may emerge. The association
could be positive. A customer may like the hotel blanket and want one for herself. In
Problem 13-25
a. The unit-level costs of production can be avoided if the skin cream is purchased. Also,
it is reasonable to assume that the cost of the production supervisor’s salary can be
avoided if the production process is eliminated. Since Koch will continue to market
Avoidable Production Costs for Koch Skin Cream
Unit-level materials costs (15,000 units x $2.00)
$ 30,000
Unit-level labor costs (15,000 units x $1.50)
22,500
Unit-level overhead costs (15,000 units x $0.50)
7,500
Skin cream production supervisor’s salary
60,000
Total avoidable costs
$120,000
b. The avoidable cost of making the skin cream is $8 per unit ($120,000 ÷ 15,000 units).
c. The cost of the supervisor’s salary is fixed relative to the number of units of skin
Supporting computations are shown below:
Avoidable Costs of Production
Unit-level materials costs (25,000 units x $2.00)
$ 50,000
Unit-level labor costs (25,000 units x $1.50)
37,500
Unit-level overhead costs (25,000 units x $0.50)
12,500
Skin cream production supervisor’s salary
60,000
Total avoidable costs
$160,000
Problem 13-25 (continued)
At this level of production the avoidable cost per unit is less to make ($6.40) than to
growth as well as current production.
d. Before committing to the outsourcing decision, Koch must consider the ability of the
supplier to provide the cream in accordance with the company’s quality standards.
Also, Koch must assure itself that the product will be delivered on a timely basis. By
Problem 13-26
a. The facility-sustaining costs and 20 percent of the inventory holding costs stay the
same regardless of whether frames are purchased or made. Since these costs do not
below:Problem 13-26 (continued)
Annual Avoidable Manufacturing Costs for Bicycle Frames
Unit-level materials costs (20,000 units x $30)
$ 600,000
Unit-level labor costs (20,000 units x $40)
800,000
Unit-level overhead costs (20,000 x $10)
200,000
Opportunity cost of equipment lease
70,000
Bike frame production supervisor’s salary
70,000
Inventory holding costs ($290,000 x 0.80)
232,000
Total costs
$1,972,000
The avoidable cost per unit is $98.60 (i.e., $1,972,000 ÷ 20,000 units). Since this
b. The avoidable costs of the two alternatives follow:
Avoidable Manufacturing Costs with the Existing Equipment
Unit-level labor Costs (20,000 units x $40)
$800,000
Opportunity cost of equipment lease
70,000
Total costs
$870,000
Cost per unit
$43.50
Avoidable Manufacturing Costs with the New Equipment
Unit-level labor costs (20,000 units x $16*)
$320,000
Depreciation cost of the equipment to be purchased**
210,000
Total costs
$530,000
Cost per unit
$26.50
Problem 13-26 (continued)
The depreciation cost of the new equipment is not a sunk cost in this case because the
new equipment has not been purchased yet. Other things being equal, the avoidable
c. If the old equipment will be replaced with the new equipment, the avoidable cost of
making the bike frames versus buying them would be as follows:
Avoidable Manufacturing Costs for Bicycle Frames
Unit-level materials costs (20,000 units x $30)
$ 600,000
Unit-level labor costs (20,000 units x $16)
320,000
Unit-level overhead costs (20,000 x $10)
200,000
Depreciation expense on manufacturing equipment
210,000
Bike frame production supervisor’s salary
70,000
Inventory holding costs ($290,000 x .80)
232,000
Total costs
$1,632,000
The cost per unit is $81.60 ($1,632,000 ÷ 20,000). If CBC replaces the old equipment
d. Before committing to the outsourcing decision, CBC must consider the ability of the
supplier to provide the frames in accordance with the company’s quality standards.
Also, CBC must assure itself that the frames will be delivered on a timely basis. By
Problem 13-27
a.
Children’s
Department
Sales
$120,000
Cost of goods sold
(70,000)
Gross margin
50,000
Department manager’s salary
(24,000)
Sales commissions
(18,000)
Contribution to profit
$ 8,000
b. Income statements before the elimination of the Children’s Department
Men’s
Department
Women’s
Department
Children’s
Department
Company
Total
Sales
$500,000
$600,000
$120,000
$1,220,000
Cost of goods sold
(210,000)
(250,000)
(70,000)
(530,000)
Gross margin
290,000
350,000
50,000
690,000
Department
manager’s salary
(52,000)
(60,000)
(24,000)
(136,000)
Sales commissions
(86,000)
(98,000)
(18,000)
(202,000)
Rent on store lease
(21,000)
(21,000)
(21,000)
(63,000)
Store utilities
(4,000)
(4,000)
(4,000)
(12,000)
Net income (loss)
$127,000
$167,000
$ (17,000)
$ 277,000
Problem 13-27 (continued)
Income statements after the elimination of the Children’s Department
Men’s
Department
Women’s
Department
Company
Total
Sales
$500,000
$600,000
$1,100,000
Cost of goods sold
(210,000)
(250,000)
(460,000)
Gross margin
290,000
350,000
640,000
Department
manager’s salary
(52,000)
(60,000)
(112,000)
Sales commissions
(86,000)
(98,000)
(184,000)
Rent on store lease
(31,500)
(31,500)
(63,000)
Store utilities
(6,000)
(6,000)
(12,000)
Net income (loss)
$114,500
$154,500
$269,000
c. Since the additional income in the amount of $20,000 is greater than the $8,000 profit