Svahn, AB, is a Swedish manufacturer of sailing yachts. The company has assembled the information
shown below that pertains to two independent decision-making contexts called Case A and Case B:
Case A:
The company chronically has no idle capacity and the old Model B100 machine is the company’s
constraint. Management is considering purchasing a Model B300 machine to use in addition to the
company’s present Model B100 machine. The old Model B100 machine will continue to be used to
capacity as before, with the new Model B300 machine being used to expand production. This will increase
the company’s production and sales. The increase in volume will be large enough to require increases in
fixed selling expenses and in general administrative overhead, but not in the fixed manufacturing overhead.
Case B:
The old Model B100 machine is not the company’s constraint, but management is considering
replacing it with a new Model B300 machine because of the potential savings in direct materials
with the new machine. The Model B100 machine would be sold. This change will have no effect on
production or sales, other than some savings in direct materials costs due to less waste.
Required:
Copy the information below onto your answer sheet and place an X in the appropriate column to indicate whether each item is relevant or irrelevant to the decision context described in Case A and Case B.
Case A Case B
Item Relevant Irrelevant Relevant Irrelevant
a. Sales revenue ……………………….
b. Direct materials . . . . . . . . . . . . . . . . . . . . . . . . . . .
c. Direct labor………………………….
d. Variable manufacturing overhead ………..
e. Depreciation—Model B100 machine………
f. Book value—Model B100 machine . . . . . . . . . .
g. Disposal value—Model B100 machine . . . . . . .
h. Market value—Model B300 machine (cost) …
i. Fixed manufacturing overhead (general)……
j. Variable selling expense . . . . . . . . . . . . . . . . . . .
k. Fixed selling expense………………….
l. General administrative overhead …………