Question

Saalfrank Corporation is considering two alternatives that are code-named M and N. Costs associated with the alternatives are listed below: Alternative M Alternative N Supplies costs $ 77,000 $ 68,000 Assembly costs $ 49,000 $ 49,000 Power costs $ 29,000 $ 44,000 Inspection costs $ 42,000 $ 31,000 Required: a. Which costs are relevant and which are not relevant in the choice between these two alternatives? b. What is the differential cost between the two alternatives?

Answer 1

Answer:

a.

Relevant costs:

Supplies costs

Inspection costs

Assembly costs

Irrelevant cost:

power cost

b.$20,000

Explanation:

The following costs are relevant because they would be incurred as a result of investing in either of the two alternatives:

Supplies costs

Inspection costs

Assembly costs

Power costs is not relevant because is not incurred as direct consequence of the two alternatives,even when none of the alternatives is chosen power cost would still be incurred.

Costs of alternative M=$77,000+$49,000+$42,000+$168000

Costs of alternative N=$68,000+$49,000+$31,000=$148,000

Differential cost=$168,000-$148,000=$20,000