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Chapter 25: Q251SE (page 1407)

You are trying to decide whether to trade in your inkjet printer for a more recent model. Your usage pattern will remain unchanged, but the old and new printers use different ink cartridges.

Indicate if the following items are relevant or irrelevant to your decision:

a. The price of the new printer

b. The price paid for the old printer

c. The trade-in value of the old printer

d. Paper cost

e. The difference between ink cartridges鈥� costs

Short Answer

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Answer

Step by step solution

01

Step-by-Step SolutionStep 1: Meaning of Purchase Decisions

Purchase decision refers to a process in which an individual or a business concern identifies itsneeds and chooses the best alternative available in the market after computing the associated costs.

02

Relevancy of the price of the new printer

The price of the new printer is relevant because this will facilitate the management to makedecisions associated with the purchaseof the printer. The administration will compute the cost of the new printer and will look for its alternative.

03

Irrelevancy of the price paid for the old printer

The price paid for the old printer is irrelevant because this will not be linked with the purchase decisions associated with the new printer anddoes not impact the decision of the management.

04

Relevancy of the trade-in value of the old printer

The trade-in value of the old printer is relevant because it will contribute toreducing the costof the new printer to the extent of thetrade-in value of the old printer.

05

Irrelevancy of paper cost

Cost of paper is irrelevantbecause paper usage will remain the same as the old printer. Therefore, the cost ofpaper will not impact the management鈥檚 decisionassociated with the purchases of a new printer.

06

Relevancy of the difference between ink cartridges’ costs

The difference between the costs of the ink cartridges is relevant because it willfacilitate the management to compute the differences in the prices of ink used by the old and new printer.

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Most popular questions from this chapter

Oak Petroleum has spent \(202,000 to refine 63,000 gallons of petroleum distillate, which can be sold for \)6.00 per gallon. Alternatively, Oak can process the distillate further and produce 58,000 gallons of cleaner fluid. The additional processing will cost \(1.80 per gallon of distillate. The cleaner fluid can be sold for \)9.10 per gallon. To sell the cleaner fluid, Oak must pay a sales commission of \(0.12 per gallon and a transportation charge of \)0.19 per gallon.

Requirements

1. Diagram Oak鈥檚 decision alternatives, using Exhibit 25-18 as a guide.

2. Identify the sunk cost. Is the sunk cost relevant to Oak鈥檚 decision?

3. Should Oak sell the petroleum distillate or process it into cleaner fluid? Show the expected net revenue difference between the two alternatives.

Skiable Acres operates a Rocky Mountain ski resort. The company is planning its lift ticket pricing for the coming ski season. Investors would like to earn a 10% return on investment on the company鈥檚 \(270,000,000 of assets. The company primarily incurs fixed costs to groom the runs and operate the lifts. Skiable Acres projects fixed costs to be \)31,000,000 for the ski season. The resort serves about 725,000 skiers and snowboarders each season. Variable costs are about \(8 per guest. Currently, the resort has such a favorable reputation among skiers and snowboarders that it has some control over the lift ticket prices.

Requirements

1. Would Skiable Acres emphasize target pricing or cost-plus pricing? Why?

2. If other resorts in the area charge \)85 per day, what price should Skiable Acres charge?

Doherty Company is considering replacing the individual printers each employee in the corporate office currently uses with a network printer located in a central area. The network printer is more efficient and would, therefore, cost less to operate than the individual printers. However, most of the office staff think having to use a centralized printer would be inconvenient. They prefer to have individual printers located at each desk. Identify the following information as financial or nonfinancial and relevant or irrelevant. The first item has been completed as an example.

Financial

Nonfinancial

Relevant

Irrelevant

  1. Amount paid for current printers
  1. Resale value of current printers
  1. Cost of new printer
  1. Operating costs of current printers
  1. Operating costs of new printer
  1. Employee morale

What is differential analysis?

What are joint costs? How do they affect the sell or process further decision?
See all solutions

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