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Q1E

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Financial & Managerial Accounting
Found in: Page 1051

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Short Answer

Complete the following descriptions using terms a through e.

a. Opportunity cost b. Avoidable costs c. Sunk cost d. Relevant benefits e. Out-of-pocket cost

1. A arises from a past decision and cannot be avoided or changed; it is irrelevant to future decisions.

2. refer to the incremental revenue generated from taking one particular action over another.

3. Relevant costs are also known as .

4. An requires a future outlay of cash and is relevant for current and future decision making.

5. An is the potential benefit lost by taking a specific action when two or more alternativechoices are available.

The sunk cost has no effect on the future decisions.

See the step by step solution

Step by Step Solution

Step 1: Definition of relevant cost

The relevant cost is the cost that is relevant to the future decision

Step 2: The blank space is filled with

  1. The sunk cost is the cost that is arises from a decision took in the past and cannot be avoided or changed in the future. So, it is irrelevant to future decisions. It the sunk cost cannot be changed. Hence, option (c) is correct
  2. The relevant benefits are known as the incremental revenue because it is generated by taking one particular action over another. Hence, option (d) is correct.
  3. The relevant costs are also known as the avoidable costs. Hence, the option (b) is correct.
  4. The out-of-pocket cost is the cost that requires a future outlay of cash and is relevant for current and future decisions. Hence, option (e) is correct.
  5. The opportunity cost is the potential benefits lost by taking a specific action when two or more alternative choices are available. Hence, option (a) is correct.

Most popular questions for Business-studies Textbooks

Elegant Decor Company’s management is trying to decide whether to eliminate Department 200, which

has produced losses or low profits for several years. The company’s 2017 departmental income statements

show the following:Year Ended December 31, 2017

Dept. 100 Dept. 200 Combined

Sales . $436,000 $290,000 $726,000

Cost of goods sold 262,000 207,000 469,000

Gross profit 174,000 83,000 257,000

Operating expenses

Direct expenses

Advertising 17,000 12,000 29,000

Store supplies used 4,000 3,800 7,800

Depreciation—Store equipment . 5,000 3,300 8,300

Total direct expenses 26,000 19,100 45,100

Allocated expenses

Sales salaries . 65,000 39,000 104,000

Rent expense 9,440 4,720 14,160

Bad debts expense 9,900 8,100 18,000

Office salary . 18,720 12,480 31,200

Insurance expense 2,000 1,100 3,100

Miscellaneous office expenses . 2,400 1,600 4,000

Total allocated expenses 107,460 67,000 174,460

Total expenses . 133,460 86,100 219,560

Net income (loss) . $ 40,540 $ (3,100) $ 37,440

In analyzing whether to eliminate Department 200, management considers the following:

a. The company has one office worker who earns $600 per week, or $31,200 per year, and four salesclerks

who each earns $500 per week, or $26,000 per year for each salesclerk.

b. The full salaries of two salesclerks are charged to Department 100. The full salary of one salesclerk is

charged to Department 200. The salary of the fourth clerk, who works half-time in both departments,

is divided evenly between the two departments.

c. Eliminating Department 200 would avoid the sales salaries and the office salary currently allocated to

it. However, management prefers another plan. Two salesclerks have indicated that they will be quitting

soon. Management believes that their work can be done by the other two clerks if the one office

worker works in sales half-time. Eliminating Department 200 will allow this shift of duties. If this

change is implemented, half the office worker’s salary would be reported as sales salaries and half

would be reported as office salary.

d. The store building is rented under a long-term lease that cannot be changed. Therefore, Department

100 will use the space and equipment currently used by Department 200.

e. Closing Department 200 will eliminate its expenses for advertising, bad debts, and store supplies; 70%

of the insurance expense allocated to it to cover its merchandise inventory; and 25% of the miscellaneous

office expenses presently allocated to it.

Required

1. Prepare a three-column report that lists items and amounts for (a) the company’s total expenses (including

cost of goods sold)—in column 1, (b) the expenses that would be eliminated by closing

Department 200—in column 2, and (c) the expenses that will continue—in column 3.

2. Prepare a forecasted annual income statement for the company reflecting the elimination of

Department 200 assuming that it will not affect Department 100’s sales and gross profit. The statement

should reflect the reassignment of the office worker to one-half time as a salesclerk.

Analysis Component

3. Reconcile the company’s combined net income with the forecasted net income assuming that

Department 200 is eliminated (list both items and amounts). Analyze the reconciliation and explain

why you think the department should or should not be eliminated.

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