Accounting: When evaluating whether to lease or sell equipment
Subject: Business / Accounting
1) When evaluating whether to lease or sell equipment, the
1) When evaluating whether to lease or sell equipment, the book value of the equipment is considered to be a sunk cost and not a differential cost.
2) Paul’s Delivery Service is considering selling one of its smaller trucks that is no longer needed in the business. The truck originally cost $23,000 and has accumulated depreciation of $10,000. The truck can be sold for $14,000. Another option is for Paul’s Delivery Service to lease the truck to another company. The lessee will pay $4,800 per year for three years. Paul’s Delivery Service will continue to pay the taxes and license fees for the truck, but all other expenses will be paid by the lessee. Management assumes the expenses for the taxes and license will be $300 per year. Which of the following statements is correct?
a. Paul’s Delivery Service should sell the truck because the differential loss from leasing is $500.
b. Paul’s Delivery Service should lease the truck because the differential income from leasing is $12,200.
c. Paul’s Delivery Service is indifferent as to whether the company should lease or sell the truck because there is no differential income or loss between the alternatives.
d. Paul’s Delivery Service should lease the truck because the differential income from leasing is $300.
3) In deciding whether to accept business at a special price when the company is operating below full capacity, the special price should be set high enough to cover both the fixed and variable costs.
4) Variable costs are costs that remain constant in total with changes in the activity level.
5) Venus Co. can further process Product X to produce Product Y. Product X is currently selling for $18 per pound and costs $12.50 per pound to produce. Product Y would sell for $32 per pound and would require an additional cost of $8.75 per pound to produce.
Based on the information provided for Venus Co., what is the differential revenue of producing Product Y?
a. $8.75 per pound
b. $14 per pound
c. $5.25 per pound
d. $7 per pound
6) A business is considering a cash outlay of $250,000 for the purchase of land, which it intends to lease for $40,000 per year. If alternative investments are available that yield an 15% return, the opportunity cost of the purchase of the land is
7) Direct materials cost is an example of a fixed cost of production.
8) If the total unit cost of manufacturing Product Y is currently $40 and the total unit cost after modifying the style is estimated to be $48, the differential cost for this situation is $8.
9) Total fixed costs remain constant as the level of activity changes within the relevant range.
10) When a product or segment of a business is determined to be generating a loss, the total income from operations for the company will always increase if management eliminates the product or segment.