Exercise 6-17B: Market Value Electricity

Exercise 6-17B
The facility-level costs are not avoidable because Norton corp. will incur
them even if it eliminates the segment. The original cost and current book
value represent different measures of the same sunk cost and are not
avoidable. The market value of the building is an opportunity cost that is
avoidable. Norton Corporation would avoid the real estate taxes if it sold
the building. These and other relevant (avoidable) costs are:
Annual advertising expense
Market value of the building (opportunity cost)
Annual maintenance costs on equipment
Annual real estate taxes on the building
Annual supervisory salaries
Total
$240,000
36,000
26,000
8,000
72,000
$382,000
Exercise 6-20B
Old Air Condition
New Air Condition
Market Value
$27,000
$80,000
Electricity
30,000/yr
20,000/yr
Electricity = 10yrs x 30,000 = $300,000 for 10 yrs

Market Value
$ 27,000
$327,000
10yrs x $20,000/yr = $200,000

$80,000
$280,000
They should buy new Air Conditioner because they can save more in considering their electricity in the
long run.
Exercise 6-22B
Sales Price ( $1000 x 50,000 )
Variable Cost ( 400 x 50,000 )
Revenue
Desktop
$50,000,000
(20,000,000)
$30,000,000
Laptop
(1,800 x 28,000) $50,400,000
(650 x 28,000) $18,200,000
$32,200,000
The company should produce laptop, as you can see on the table, Desktops revenue is only
$30,000,000 while the laptop is $32,200,000. Problem
a.
6-24B
With respect to a decision regarding the selection of Order A versus Order 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
sustain companywide operations. These facility-sustaining costs will be incurred
regardless of which job is accepted and therefore are not avoidable. The fact that more
of the companywide overhead cost is allocated to one job than another is irrelevant
because the total companywide overhead cost cannot be avoided regardless of how it is
allocated between jobs. The supervisors salary and the insurance coverage are
irrelevant because they do not differ between the alternatives. These costs will be the
same regardless of which alternative is accepted. You cannot avoid either cost
regardless of which order is accepted. The depreciation on tools cannot be eliminated
because they are sunk costs. The relevant information is summarized below:
Decision
Contract price
Unit-level materials
Unit-level labor
Unit-level overhead
Rental equipment costs
Contribution to profit
Order A
$900,000
(350,000)
(324,000)
(106,000)
(20,000)
$100,000
Order B
$670,000
(256,000)
(264,800)
(98,000)
(24,000)
$ 27,200
Since Order A provides the higher contribution to profit, it should be accepted.
Problem 6-24B (continued)

b.
With respect to a decision regarding the acceptance or rejection of Order B standing alone:
changing the decision context changes the items that are considered relevant. While supervisors
salary and insurance costs cannot be avoided by selecting one order over another, they can be
avoided by rejecting both orders. Accordingly, these costs would be relevant to a decision
regarding whether to accept or reject Order B standing alone. The relevant information for Order
B only is shown below:
Decision
Contract price
Unit-level materials
Unit-level labor
Unit-level overhead
Supervisors salary
Rental equipment costs
Insurance coverage
Contribution to profit
Offer B
$670,000
(286,000)
(264,800)
(98,000)
(80,000)
(24,000)
(54,000)
$(136,800)
Since the avoidable costs exceed the differential revenue, Order B should be rejected.
This problem illustrates the fact that the avoidable concept is context sensitive. Identifying the
appropriate decision is critically important. Order B should never have been compared to Order A
because Order B does not provide a contribution to profit. A contribution to profit analysis should
be performed before attempting to compare alternative orders.
Exercise 6-21B
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: $1,300 5 years = $260 per year. Since the annual cost of
using the riding mower is lower than the annual cost of hiring someone to do the work, Paul should keep
the lawn mower and not hire a lawn service.
b. The total cost of hiring a lawn service for a five-year period is $2,000 ($400 x 5). Since the total cost of
hiring a lawn service is more than the total opportunity cost ($1,300), Paul should keep the lawn mower
and not hire a lawn service. The conclusion is the same as that determined in requirement a because the
same data apply to both requirements. The only difference is that requirement a uses an annual analysis
and requirement b is based on cumulative totals.

Exercise 6-17B: Market Value Electricity

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Exercise 6-17B

New Air Condition

Electricity = 10yrs x 30,000 = $300,000 for 10 yrs

10yrs x $20,000/yr = $200,000

Since Order A provides the higher contribution to profit, it should be accepted.

Problem 6-24B (continued)

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