Concept explainers
Concept Introduction:
Decision making plays an important role in the management. The decisions taken by managers are called managerial decisions. Managerial Decisions are decisions taken by managers for the operations of a firm. These decisions include setting target growth rates, hiring or firing employees, and deciding what products to sell. Manager's decisions are taken on the basis of quantitative as well as the qualitative measures. The managerial decision includes the decisions like make or buy, accept or reject new offers, sell or further process etc. These decisions are taken on the basis of relevant costs.
Relevant costs are the costs that are relevant for any decision making. Relevant costs are helpful for take managerial decisions like make or buy, accept or reject new offers, sell or further process etc.
Two basic types of the relevant costs are as follows:
- Out-of-pocket costs
- Opportunity costs
To Indicate:
If the proposal should be accepted or not
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Survey of Accounting (Accounting I)
- Differential Analysis Involving Opportunity Costs On October 1, Matrix Stores Inc. is considering leasing a building and purchasing the necessary equipment to operate a retail store. Alternatively, the company could use the funds to invest in $149,100 of 6% U.S. Treasury bonds that mature in 16 years. The bonds could be purchased at face value. The following data have been assembled: Cost of store equipment $149,100 Life of store equipment 16 years Estimated residual value of store equipment $17,900 Yearly costs to operate the store, excluding depreciation of store equipment $56,100 Yearly expected revenues—years 1-8 $74,800 Yearly expected revenues—years 9-16 $71,000 Required: 1. Prepare a differential analysis as of October 1 to determine whether to Operate Retail Store (Alternative 1) or Invest in Bonds (Alternative 2). If an amount is zero, enter zero "0". For those boxes in which you must enter subtracted or negative numbers use a minus sign.…arrow_forwardDifferential Analysis Involving Opportunity Costs On July 1, Matrix Stores Inc. is considering leasing a building and buying the necessary equipment to operate a public warehouse. Alternatively, the company could use the funds to invest in $149,800 of 6% U.S. Treasury bonds that mature in 16 years. The bonds could be purchased at face value. The following data have been assembled: Cost of store equipment $149,800 Life of store equipment 16 years Estimated residual value of store equipment $17,800 Yearly costs to operate the warehouse, excluding depreciation of equipment $55,600 Yearly expected revenues—years 1-8 74,600 Yearly expected revenues—years 9-16 70,200 Required: 1. Prepare a differential analysis as of July 1 presenting the proposed operation of the warehouse for the 16 years (Alternative 1) as compared with investing in U.S. Treasury bonds (Alternative 2). If an amount is zero, enter "0". If required, use a minus sign to indicate a loss.…arrow_forwardDifferential Analysis Involving Opportunity Costs On July 1, Matrix Stores Inc. is considering leasing a building and buying the necessary equipment to operate a public warehouse. Alternatively, the company could use the funds to invest in $149,800 of 6% U.S. Treasury bonds that mature in 16 years. The bonds could be purchased at face value. The following data have been assembled: Cost of store equipment $149,800 Life of store equipment 16 years Estimated residual value of store equipment $17,600 Yearly costs to operate the warehouse, excluding depreciation of equipment $56,100 Yearly expected revenues-years 1-8 76,000 Yearly expected revenues-years 9-16 70,400 Required: 1. Prepare a differential analysis as of July 1 presenting the proposed operation of the warehouse for the 16 years (Alternative 1) as compared with investing in U.S. Treasury bonds (Alternative 2). If an amount is zero, enter "0". If required, use a minus sign to indicate a loss.arrow_forward
- Differential Analysis Involving Opportunity Costs On August 1, Rantoul Stores Inc. is considering leasing a building and purchasing the necessary equipment to operate a retail store. Alternative company could use the funds to invest in $1,000,000 of 4% U.S. Treasury bonds that mature in 15 years. The bonds could be purchased at face The following data have been assembled: Cost of store equipment $1,000,000 Life of store equipment 15 years Estimated residual value of store equipment $50,000 Yearly costs to operate the store, excluding depreciation of store equipment $200,000 Yearly expected revenues-years 1-6 $300,000 Yearly expected revenues-years 7-15 $400,000 Required: 1. Prepare a differential analysis as of August 1 presenting the proposed operation of the store for the 15 years (Alternative 1) as compared with investing in U.S. Treasury bonds (Alternative 2). If an amount is zero, enter "0". Differential Analysis Operate Retail (Alt. 1) or Invest in Bonds (Alt. 2) August 1 Invest…arrow_forwardDifferential Analysis Involving Opportunity Costs On July 1, Midway Distribution Company is considering leasing a building and buying the necessary equipment to operate a public warehouse. Alternatively, the company could use the funds to invest in $148,600 of 5% U.S. Treasury bonds that mature in 16 years. The bonds could be purchased at face value. The following data have been assembled: Cost of store equipment $148,600 Life of store equipment 16 years Estimated residual value of store equipment $17,400 Yearly costs to operate the warehouse, excluding depreciation of equipment depreciation of store equipment $56,900 Yearly expected revenues—years 1-8 75,300 Yearly expected revenues—years 9-16 69,100 Required: 1. Prepare a differential analysis as of July 1 presenting the proposed operation of the warehouse for the 16 years (Alternative 1) as compared with investing in U.S. Treasury bonds (Alternative 2). If an amount is zero, enter "0". For those boxes…arrow_forwardDifferential Analysis Involving Opportunity Costs On August 1, Rantoul Stores Inc. is considering leasing a building and purchasing the necessary equipment to operate a retail store. Alternatively, the company could use the funds to invest in $1,000,000 of 4% U.S. Treasury bonds that mature in 15 years. The bonds could be purchased at face value. The following data have been assembled: Cost of store equipment $1,000,000 Life of store equipment 15 years Estimated residual value of store equipment $50,000 Yearly costs to operate the store, excluding depreciation of store equipment $200,000 Yearly expected revenues—years 1–6 $300,000 Yearly expected revenues—years 7–15 $400,000arrow_forward
- Differential Analysis Involving Opportunity Costs On August 1, Rantoul Stores Inc. is considering leasing a building and purchasing the necessary equipment to operate a retail store. Alternatively, the company could use the funds to invest in $1,000,000 of 4% U.S. Treasury bonds that mature in 15 years. The bonds could be purchased at face value. The following data have been assembled: Cost of store equipment $1,000,000 Life of store equipment 15 years Estimated residual value of store equipment $50,000 Yearly costs to operate the store, excluding depreciation of store equipment $200,000 Yearly expected revenues—years 1–6 $300,000 Yearly expected revenues—years 7–15 $400,000 Required: Prepare a differential analysis as of August 1 presenting the proposed operation of the store for the 15 years (Alternative 1) as compared with investing in U.S. Treasury bonds (Alternative 2). If an amount is zero, enter "0". Differential…arrow_forwardDifferential Analysis Involving Opportunity Costs On October 1, Midway Distribution Company is considering leasing a building and purchasing the necessary equipment to operate a retail store. Alternatively, the company could use the funds to invest in $148,300 of 6% U.S. Treasury bonds that mature in 16 years. The bonds could be purchased at face value. The following data have been assembled: Cost of store equipment $148,300 Life of store equipment 16 years Estimated residual value of store equipment $18,700 Yearly costs to operate the store, excluding depreciation of store equipment $56,300 Yearly expected revenues—years 1-8 $75,300 Yearly expected revenues—years 9-16 $70,600 Required: 1. Prepare a differential analysis as of October 1 presenting the proposed operation of the store for the 16 years (Alternative 1) as compared with investing in U.S. Treasury bonds (Alternative 2). If an amount is zero, enter zero "0". Differential Analysis Operate…arrow_forwardDifferential Analysis Involving Opportunity Costs On July 1, Midway Distribution Company is considering leasing a building and buying the necessary equipment to operate a public warehouse. Alternatively, the company could use the funds to invest in $150,400 of 6% U.S. Treasury bonds that mature in 16 years. The bonds could be purchased at face value. The following data have been assembled: Cost of store equipment $150,400 Life of store equipment 16 years Estimated residual value of store equipment $18,900 Yearly costs to operate the warehouse, excluding depreciation of equipment depreciation of store equipment $56,200 Yearly expected revenues—years 1-8 74,600 Yearly expected revenues—years 9-16 70,500 Required: 1. Prepare a differential analysis as of July 1 presenting the proposed operation of the warehouse for the 16 years (Alternative 1) as compared with investing in U.S. Treasury bonds (Alternative 2). If an amount is zero, enter "0". For those boxes…arrow_forward
- Differential Analysis Involving Opportunity CostsOn July 1, Coastal Distribution Company is considering leasing a building and buying the necessaryequipment to operate a public warehouse. Alternatively, the company could use the funds to invest in$740,000 of 5% U.S. Treasury bonds that mature in 14 years. The bonds could be purchased at face value.The following data have been assembled:Cost of store equipment $740,000Life of store equipment 14 yearsEstimated residual value of store equipment $75,000Yearly costs to operate the warehouse, excludingdepreciation of store equipment $175,000Yearly expected revenues—years 1-7 $280,000Yearly expected revenues—years 8-14 $240,000Required:1. Prepare a differential analysis as of July 1 presenting the proposed operation of the warehouse for the14 years (Alternative 1) as compared with investing in U.S. Treasury bonds (Alternative 2). If an amount iszero, enter "0". For those boxes in which you must enter subtracted or negative numbers use a…arrow_forwardUsing capital rationing to make capital investment decisions Mountain Manufacturing is considering the following capital investment proposals. Mountains requirement criteria include a maximum payback period of five years and a required rate of return of 12.5%. Determine if each investment is acceptable or should be rejected (ignore qualitative factors). Rank the acceptable investments in order from most desirable to least desirable.arrow_forwardConsider the following:purchase of an office building worth P1M from unrestricted funding. Currently, the office building is on a 2 year lease, with rentals of BWP 22000 per month. Provide for recommendations to the finance manager. What what would be the possible effect on the financial health of the organization, if these transactions are approved?arrow_forward
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