Question

Nicklin Corporation is considering two alternatives, code-named M and N. Costs associated with the alternatives are listed below:
Alternative M Alternative N
Supplies costs $ 77,000 $ 68,000
Power costs $ 49,000 $ 49,000
Inspection costs $ 29,000 $ 44,000
Assembly costs $ 42,000 $ 31,000

Required:

a. Which costs are relevant and which are not relevant in the choice between these two alternatives?

Supplies costs
Power costs
Inspection costs
Assembly costs

b. What is the differential cost between Alternative M and Alternative N? (Negative amount should be indicated by a minus sign.) fferential cost

Answer 1

Answer and Explanation:

a. The cost that are relevant or irrelevant is shown below:-

Relevant costs are those costs which influence the company's decision-making process and these costs vary between alternatives. However, irrelevant costs are the same for each alternative and thus do not impact decision-making processes.

Supplies costs = Relevant

Supplies cost is relevant as amount are vary between alternatives

Power cost = Irrelevant

Power cost is relevant as amount is not vary between the alternatives

Inspection cost = Relevant

Inspection cost is relevant  as amount are vary between alternatives

Assembly cost = Relevant

Assembly cost is Relevant as amount are vary between alternatives

b. The computation of differential cost between Alternative M and Alternative N is shown below:-

                              Alternative M        Alternative N       Differential cost

Supplies costs         $77,000               $68,000              $9,000

Power costs             $49,000               $49,000              $0

Inspection costs       $29,000              $44,000              -$15,000

Assembly costs         $42,000              $31,000              $11,000

Differential cost         $197,000             $192,000           $5,000