ABC Company has just received a special order for 1,000 deck chairs. ABC has suf
ID: 2434842 • Letter: A
Question
ABC Company has just received a special order for 1,000 deck chairs. ABC has sufficient idle capacity to accept the order. Indicate whether the given cost is a sunk cost, opportunity cost, relevant or not relevant to the decision to accept the special order, variable or fixed. A variable cost is one that varies with the number of chairs that Halley makes. Note: you will choose multiple options for each scenario.
1. Raw materials to make 1,000 deck chairs
2. Depreciation on equipment that will be used to make chairs
3. Revenue that could be earned if special order is not accepted
4. Salary of the production department manager (department that will make the chairs)
5.Equipment set-up costs incurred to make the chairs
6. Company president's salary
7. Material's handling cost
8. Effect of accepting the order on Company's reputation
9. Engineering design costs incurred when chair's design was first developed
10. Engineering design costs incurred to customize the chairs to customers' specifications
11. Direct labor costs to make 1,000 chairs
12. Maintenance on the equipment that would have been performed during the idle time if the order had not been accepted
13. manager's estimates of revenue that may be generated from this customer in the future if the special order is accepted
Explanation / Answer
1. Raw materials to make 1,000 deck chairs - Variable cost 2. Depreciation on equipment that will be used to make chairs – relevant cost 3. Revenue that could be earned if special order is not accepted – Opportunity cost. 4. Salary of the production department manager (department that will make the chairs) – sunk cost 5.Equipment set-up costs incurred to make the chairs – relevant cost 6. Company president's salary – sunk cost 7. Material's handling cost – relevant cost 8. Effect of accepting the order on Company's reputation - 9. Engineering design costs incurred when chair's design was first developed – sunk cost 10. Engineering design costs incurred to customize the chairs to customers' specifications –relevant cost 11. Direct labor costs to make 1,000 chairs – variable cost 12. Maintenance on the equipment that would have been performed during the idle time if the order had not been accepted – not relevant cost 13. manager's estimates of revenue that may be generated from this customer in the future if the special order is accepted – Not relevant cost.