Chapter 9
Relevant Costs: The Key to Decision
Making
Solutions to Questions
9-1 A relevant cost in a decision is a
cost that differs between alternatives. 9-8 Only those costs that can be
avoided as a result of dropping the
9-2 An incremental cost (or revenue) is product line are relevant in the decision.
the change in cost (or revenue) that will Sunk costs and costs that will not differ
result from some proposed action. An regardless of whether the line is retained
opportunity cost is the benefit that is lost or discontinued are irrelevant.
or sacrificed in rejecting some course of
action. A sunk cost is a cost that has 9-9 No. If a product line shows a loss it
already been incurred, and that cannot be may be the result of allocated common
changed by any future decision. costs or of sunk costs that will continue
even if the product line were eliminated. A
9-3 No. Variable costs are relevant product line should be discontinued only if
costs only if they differ between the the contribution margin that will be lost as
alternatives under consideration. a result of dropping the line is less than
the fixed costs that can be avoided. Even
9-4 The original cost of a machine that then there may be arguments in favour of
the company already owns is a sunk cost retaining the product line if its presence
that cannot differ between alternatives, promotes the sale of other products.
and hence cannot be a relevant cost.
9-10 The danger is that such allocations
9-5 No. Not all fixed costs are sunk— can make a product line (or other segment
only those for which a cost outlay has of an organization) appear to be
already been made. A variable cost can be unprofitable, whereas in fact the line may
a sunk cost, if it has already been be profitable.
incurred.
9-11 If a company decides to make a
9-6 No. A variable cost is a cost that part internally rather than to buy it from
varies in total amount in direct proportion an outside supplier, then a portion of the
to changes in the level of activity. A company’s facilities has to be turned over
differential cost measures the difference in to the production of the part. The
cost between two alternatives. A variable company’s opportunity cost is measured
cost could be the same between two by the benefits that could be derived from
alternatives and thus is not a differential the best alternative use of the facilities.
cost.
9-12 There are many possible examples
9-7 No. Only those future costs that of constraints including: machine time,
differ between the alternatives under direct labour time, floor space, raw
consideration are relevant costs in materials, investment capital, supervisory
decisions. time, computer time, and storage space.
Copyright © 2023 McGraw Hill Ltd. All rights reserved.
Solutions Manual, Chapter 9
1
,9-13 Assuming no change in fixed costs,
profits are maximized when total
contribution margin is maximized. A firm
can maximize its contribution margin by
focusing on those products that promise
the greatest amount of contribution
margin per unit of the constrained
resource.
9-14 Most costs of a flight are either
sunk costs, or costs that will not change
regardless of the number of passengers on
board. Depreciation of the aircraft, salaries
of personnel on the ground and in the air,
and fuel costs, for example, are largely a
function of making the flight itself rather
than a function of the number of persons
occupying seats. Therefore, adding more
passengers at reduced fares at certain
times of the week (usually during “off
times” when seats otherwise would go
unoccupied) does little to increase the
total costs of making the flight, but can do
much to increase the total contribution.
© The McGraw-Hill Companies, Inc., 2002. All rights reserved.
2 Introduction to Managerial Accounting, 1st Edition
,The Foundational 15 (LO1 – CC1, 3, 4, 5; LO2 – CC8)
9-1. The total traceable fixed manufacturing overhead for X and Y is
computed as follows:
X Y
Traceable fixed overhead per unit (a)............ $16 $18
Level of activity in units (b)........................... 100,000 100,000
Total traceable fixed overhead (a) × (b)........ $1,600,000 $1,800,000
9-2. The total common fixed expenses are computed as follows:
X Y
Common fixed expenses per unit (a)............. $15 $10
Level of activity in units (b)........................... 100,000 100,000
Total common fixed expenses (a) × (b)......... $1,500,000 $1,000,000
The company’s total common fixed expenses would be $2,500,000.
9-3. The profit impact is computed as follows:
Per Total
Unit 10,000 units
Incremental revenue................................ $70 $700,000
Incremental costs:
Variable costs:
Direct materials.................................. 30 300,000
Direct labor......................................... 20 200,000
Variable manufacturing overhead....... 7 70,000
Variable selling expenses.................... 12 120,000
Total variable cost................................. $69 690,000
Incremental net operating income........... $10,000
Copyright © 2023 McGraw Hill Ltd. All rights reserved.
Solutions Manual, Chapter 9
3
, The Foundational 15 (continued)
9-4. The profit impact is computed as follows:
Per Total
Unit 5,000 units
Incremental revenue................................ $39 $195,000
Incremental costs:
Variable costs:
Direct materials.................................. 10 60,000
Direct labor......................................... 15 75,000
Variable manufacturing overhead....... 7 25,000
Variable selling expenses.................... 8 40,000
Total variable cost................................. $40 200,000
Incremental net operating income........... $ (5,000)
9-5. The profit impact is computed as follows:
Incremental revenue
(10,000 units × $80) (a)................................................ $800,000
Incremental variable costs:
Direct materials (5,000 units × $30).......................... $150,000
Direct labor (5,000 units × $20).................................100,000
Variable manufacturing overhead
(5,000 units × $7)....................................................
35,000
Variable selling expenses
(5,000 units × $12)..................................................
60,000
Total incremental variable cost (b)................................ 345,000
Foregone sales to regular customers
(5,000 units × $120) (c)................................................ 600,000
Incremental net operating income
(a) − (b) – (c)................................................................. $(145,000)
Note to instructors: Emphasize to students that the incremental
production is 5,000 units only. However, 10,000 units will be sold @$80
per unit to the new customers but this will also reduce sales to regular
customers by 5,000 units (@$120 per unit). Therefore, the relevant
variable costs are for 5,000 units only.
Copyright © 2023 McGraw Hill Ltd. All rights reserved.
4 Introduction to Managerial Accounting, Seventh Canadian
Edition
Relevant Costs: The Key to Decision
Making
Solutions to Questions
9-1 A relevant cost in a decision is a
cost that differs between alternatives. 9-8 Only those costs that can be
avoided as a result of dropping the
9-2 An incremental cost (or revenue) is product line are relevant in the decision.
the change in cost (or revenue) that will Sunk costs and costs that will not differ
result from some proposed action. An regardless of whether the line is retained
opportunity cost is the benefit that is lost or discontinued are irrelevant.
or sacrificed in rejecting some course of
action. A sunk cost is a cost that has 9-9 No. If a product line shows a loss it
already been incurred, and that cannot be may be the result of allocated common
changed by any future decision. costs or of sunk costs that will continue
even if the product line were eliminated. A
9-3 No. Variable costs are relevant product line should be discontinued only if
costs only if they differ between the the contribution margin that will be lost as
alternatives under consideration. a result of dropping the line is less than
the fixed costs that can be avoided. Even
9-4 The original cost of a machine that then there may be arguments in favour of
the company already owns is a sunk cost retaining the product line if its presence
that cannot differ between alternatives, promotes the sale of other products.
and hence cannot be a relevant cost.
9-10 The danger is that such allocations
9-5 No. Not all fixed costs are sunk— can make a product line (or other segment
only those for which a cost outlay has of an organization) appear to be
already been made. A variable cost can be unprofitable, whereas in fact the line may
a sunk cost, if it has already been be profitable.
incurred.
9-11 If a company decides to make a
9-6 No. A variable cost is a cost that part internally rather than to buy it from
varies in total amount in direct proportion an outside supplier, then a portion of the
to changes in the level of activity. A company’s facilities has to be turned over
differential cost measures the difference in to the production of the part. The
cost between two alternatives. A variable company’s opportunity cost is measured
cost could be the same between two by the benefits that could be derived from
alternatives and thus is not a differential the best alternative use of the facilities.
cost.
9-12 There are many possible examples
9-7 No. Only those future costs that of constraints including: machine time,
differ between the alternatives under direct labour time, floor space, raw
consideration are relevant costs in materials, investment capital, supervisory
decisions. time, computer time, and storage space.
Copyright © 2023 McGraw Hill Ltd. All rights reserved.
Solutions Manual, Chapter 9
1
,9-13 Assuming no change in fixed costs,
profits are maximized when total
contribution margin is maximized. A firm
can maximize its contribution margin by
focusing on those products that promise
the greatest amount of contribution
margin per unit of the constrained
resource.
9-14 Most costs of a flight are either
sunk costs, or costs that will not change
regardless of the number of passengers on
board. Depreciation of the aircraft, salaries
of personnel on the ground and in the air,
and fuel costs, for example, are largely a
function of making the flight itself rather
than a function of the number of persons
occupying seats. Therefore, adding more
passengers at reduced fares at certain
times of the week (usually during “off
times” when seats otherwise would go
unoccupied) does little to increase the
total costs of making the flight, but can do
much to increase the total contribution.
© The McGraw-Hill Companies, Inc., 2002. All rights reserved.
2 Introduction to Managerial Accounting, 1st Edition
,The Foundational 15 (LO1 – CC1, 3, 4, 5; LO2 – CC8)
9-1. The total traceable fixed manufacturing overhead for X and Y is
computed as follows:
X Y
Traceable fixed overhead per unit (a)............ $16 $18
Level of activity in units (b)........................... 100,000 100,000
Total traceable fixed overhead (a) × (b)........ $1,600,000 $1,800,000
9-2. The total common fixed expenses are computed as follows:
X Y
Common fixed expenses per unit (a)............. $15 $10
Level of activity in units (b)........................... 100,000 100,000
Total common fixed expenses (a) × (b)......... $1,500,000 $1,000,000
The company’s total common fixed expenses would be $2,500,000.
9-3. The profit impact is computed as follows:
Per Total
Unit 10,000 units
Incremental revenue................................ $70 $700,000
Incremental costs:
Variable costs:
Direct materials.................................. 30 300,000
Direct labor......................................... 20 200,000
Variable manufacturing overhead....... 7 70,000
Variable selling expenses.................... 12 120,000
Total variable cost................................. $69 690,000
Incremental net operating income........... $10,000
Copyright © 2023 McGraw Hill Ltd. All rights reserved.
Solutions Manual, Chapter 9
3
, The Foundational 15 (continued)
9-4. The profit impact is computed as follows:
Per Total
Unit 5,000 units
Incremental revenue................................ $39 $195,000
Incremental costs:
Variable costs:
Direct materials.................................. 10 60,000
Direct labor......................................... 15 75,000
Variable manufacturing overhead....... 7 25,000
Variable selling expenses.................... 8 40,000
Total variable cost................................. $40 200,000
Incremental net operating income........... $ (5,000)
9-5. The profit impact is computed as follows:
Incremental revenue
(10,000 units × $80) (a)................................................ $800,000
Incremental variable costs:
Direct materials (5,000 units × $30).......................... $150,000
Direct labor (5,000 units × $20).................................100,000
Variable manufacturing overhead
(5,000 units × $7)....................................................
35,000
Variable selling expenses
(5,000 units × $12)..................................................
60,000
Total incremental variable cost (b)................................ 345,000
Foregone sales to regular customers
(5,000 units × $120) (c)................................................ 600,000
Incremental net operating income
(a) − (b) – (c)................................................................. $(145,000)
Note to instructors: Emphasize to students that the incremental
production is 5,000 units only. However, 10,000 units will be sold @$80
per unit to the new customers but this will also reduce sales to regular
customers by 5,000 units (@$120 per unit). Therefore, the relevant
variable costs are for 5,000 units only.
Copyright © 2023 McGraw Hill Ltd. All rights reserved.
4 Introduction to Managerial Accounting, Seventh Canadian
Edition
