Question

Maddox, a division of Stanley Enterprises, currently performs computer services for various departments of the firm. One of the services has created a number of operating problems, and management is exploring whether to outsource the service to a consultant. Variable and fixed operating costs total $100,000 and $50,000, respectively. In addition, Stanley allocates $20,000 of corporate administrative overhead to Maddox. If Maddox were to use the outside consultant, fixed operating costs would be reduced by 70%.

24. The irrelevant costs in Maddox's outsourcing decision total:

25. The relevant costs in Maddox's outsourcing decision total:

26. A special order generally should be accepted if: A. excess capacity exists and the revenue exceeds all variable costs associated with the order.

B. excess capacity exists and the revenue exceeds allocated fixed costs.

C. its revenue exceeds allocated fixed costs, regardless of the variable costs associated with the order.

D. the revenue exceeds total costs, regardless of available capacity.

E. the revenue exceeds variable costs, regardless of available capacity.

27. Which of the following best defines the concept of a relevant cost?

A. A past cost that is the same among alternatives.

B. A past cost that differs among alternatives.

C. A future cost that is the same among alternatives.

D. A future cost that differs among alternatives.

E. A cost that is based on past experience.

Answer 1

24.Irrelevant costs are the unavoidable cost

= Fixed operating cost*30% + Allocated costs

= 50,000*30% + 20,000

= $35,000

25.Relevant costs are the avoidable costs

= 100,000+50,000*70%

= $135,000

26. A. excess capacity exists and the revenue exceeds all variable costs associated with the order.

27. D. A future cost that differs among alternatives.

Past cost is sunk cost

Future cost which is same is not relevant