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When is nonfinancial information relevant?

Short Answer

Expert verified

The non-financial information is considered relevant when managers are required to makequalitative decisionsassociated with the business.

Step by step solution

01

Meaning of Information

In general terms, information refers to the data which is organized and structured. Such data can be financial and non-financial or may be associated with the technical information of a business concern.

02

Relevancy of non-financial information

If expected future data differs among the alternatives, in such a case, non-financial information is relevant. Also, when non-financial information plays an important role in drafting quantitative and qualitative decisions and impacts the potential decision of the managers, it becomes relevant.

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Most popular questions from this chapter

Snow Ride manufactures snowboards. Its cost of making 1,900 bindings is as follows:

Direct materials \(17,590

Direct labor 3,200

Variable overhead 2,080

Fixed overhead 6,300

Total manufacturing costs for 1,900 bindings \)29,170

Suppose Livingston will sell bindings to Snow Ride for \(13 each. Snow Ride would pay \)3 per unit to transport the bindings to its manufacturing plant, where it would add its own logo at a cost of \(0.50 per binding.

Requirements

1. Snow Rideโ€™s accountants predict that purchasing the bindings from Livingston will enable the company to avoid \)2,100 of fixed overhead. Prepare an analysis to show whether Snow Ride should make or buy the bindings.

2. The facilities freed by purchasing bindings from Livingston can be used to manufacture another product that will contribute $3,100 to profit. Total fixed costs will be the same as if Snow Ride had produced the bindings. Show which alternative makes the best use of Snow Rideโ€™s facilities: (a) make bindings, (b) buy bindings and leave facilities idle, or (c) buy bindings and make another product.

Cold Sports manufactures snowboards. Its cost of making 2,000 bindings is as follows:

Direct materials \(17,510

Direct labor 2,600

Variable overhead 2,060

Fixed overhead 7,000

Total manufacturing costs for 2,000 bindings \)29,170

Suppose Topnotch will sell bindings to Cold Sports for \(15 each. Cold Sports would pay \)3 per unit to transport the bindings to its manufacturing plant, where it would add its own logo at a cost of \(0.50 per binding.

Requirements

1. Cold Sportsโ€™s accountants predict that purchasing the bindings from Topnotch will enable the company to avoid \)2,300 of fixed overhead. Prepare an analysis to show whether Cold Sports should make or buy the bindings.

2. The facilities freed by purchasing bindings from Topnotch can be used to manufacture another product that will contribute $3,100 to profit. Total fixed costs will be the same as if Cold Sports had produced the bindings. Show which alternative makes the best use of Cold Sportsโ€™s facilities: (a) make bindings, (b) buy bindings and leave facilities idle, or (c) buy bindings and make another product.

Grimm Company makes decorative wedding cakes. The company is considering buying the cakes rather than baking them, which will allow it to concentrate on decorating. The company averages 100 wedding cakes per year and incurs the following costs from baking wedding cakes:

Direct materials \(500

Direct labor 1,000

Variable manufacturing overhead 200

Fixed manufacturing overhead 1,200

Total manufacturing cost \)2,900

Number of cakes รท 100

Cost per cake \(29

Fixed costs are primarily the depreciation on kitchen equipment such as ovens and mixers. Grimm expects to retain the equipment. Grimm can buy the cakes for \)25.

  1. Should Grimm make the cakes or buy them? Why?
  2. If Grimm decides to buy the cakes, what are some qualitative factors that Grimm should also consider?

What is cost-plus pricing? Who uses it?

McCollum Company manufactures two products. Both products have the same sales price, and the volume of sales is equivalent. However, due to the difference in production processes, Product A has higher variable costs and Product B has higher fixed costs. Management is considering dropping Product B because that product line has an operating loss.

MCCOLLUM COMPANY

Income Statement

Month Ended June 30, 2018

Total Product A Product B

Net Sales Revenue \(150,000 \)75,000 \(75,000

Variable Costs 90,000 55,000 35,000

Contribution Margin 60,000 20,000 40,000

Fixed Costs 50,000 5,000 45,000

Operating Income/(Loss) \)10,000 \(15,000 \)(5,000)

  1. If fixed costs cannot be avoided, should McCollum drop Product B? Why or why not?
  2. If 50% of Product Bโ€™s fixed costs are avoidable, should McCollum drop Product B? Why or why not?
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