Relevant or avoidable costs and Irrelevant or unavoidable costs – The major decisions that a business has to take during its operations include dropping of a product, elimination of a segment, buy or make a product, to sell at scrap or rework on the product, to accept special offers etc. All these decisions are taken on the basis of the costs involved. There are two types of costs – 1. Relevant costs or avoidable costs – these costs can be defined as the costs that can be avoided if we choose over option over the other. Example of relevant costs are, direct material, direct labor, avoidable fixed costs etc. 2. Irrelevant costs – these costs can be defined as the costs that cannot be avoided in any of the options available or the costs which have been already incurred like sunk costs. Examples of irrelevant costs are unavoidable fixed costs, or the costs which have been already incurred. Requirement 1 To identify: The expected costs under the three alternatives – (a) Make (b) Buy, and leave the facilities idle (c) Buy and use facilities for another product

Question

The December 31, 2021, balance sheet of Chen, Incorporated, showed long-term debt of $1,420,000, $144,000 in the common stock account, and $2,690,000 in the additional paid-in surplus account. The December 31, 2022, balance sheet showed long-term debt of $1,620,000, $154,000 in the common stock account and $2,990,000 in the additional paid-in surplus account. The 2022 income statement showed an interest expense of $96,000 and the company paid out $149,000 in cash dividends during 2022. The firm’s net capital spending for 2022 was $1,000,000, and the firm reduced its net working capital investment by $129,000. What was the firm's 2022 operating cash flow, or OCF?

Answer 1

Question

Chapter 25, Problem E25.19E

To determine

Concept Introduction:

Relevant or avoidable costs and Irrelevant or unavoidable costs –

The major decisions that a business has to take during its operations include dropping of a product, elimination of a segment, buy or make a product, to sell at scrap or rework on the product, to accept special offers etc. All these decisions are taken on the basis of the costs involved. There are two types of costs –

1. Relevant costs or avoidable costs – these costs can be defined as the costs that can be avoided if we choose over option over the other. Example of relevant costs are, direct material, direct labor, avoidable fixed costs etc.

2. Irrelevant costs – these costs can be defined as the costs that cannot be avoided in any of the options available or the costs which have been already incurred like sunk costs. Examples of irrelevant costs are unavoidable fixed costs, or the costs which have been already incurred.

Requirement 1

To identify:

The expected costs under the three alternatives –

(a) Make

(b) Buy, and leave the facilities idle

(c) Buy and use facilities for another product

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