Author Question: A purchase of supplies on account should be recorded as a. a debit to Supplies and a credit to ... (Read 217 times)

imanialler · **on:** Jul 6, 2018

A purchase of supplies on account should be recorded as
a. a debit to Supplies and a credit to Cash.
b. a debit to Accounts Payable and a credit to Supplies.
c. a debit to Supplies and a credit to Accounts Payable.
d. a debit to Supplies Expense and a credit to Accounts Receivable.
e. none of these.

Question 2

Relevant costs, opportunity costs.

Gavin Martin, the general manager of Oregano Software, must decide when to release the new version of Oregano's spreadsheet package, Easyspread 2.0. Development of Easyspread 2.0 is complete; however, the diskettes, compact discs, and user manuals have not yet been produced. The product can be shipped starting July 1, 2014.
The major problem is that Oregano has overstocked the previous version of its spreadsheet package, Easyspread 1.0. Martin knows that once Easyspread 2.0 is introduced, Oregano will not be able to sell any more units of Easyspread 1.0. Rather than just throwing away the inventory of Easyspread 1.0, Martin is wondering if it might be better to continue to sell Easyspread 1.0 for the next three months and introduce Easyspread 2.0 on October 1, 2014, when the inventory of Easyspread 1.0 will be sold out.
The following information is available:

Development cost per unit for each product equals the total costs of developing the software product divided by the anticipated unit sales over the life of the product. Marketing and administrative costs are fixed costs in 2014, incurred to support all marketing and administrative activities of Oregano Software. Marketing and administrative costs are allocated to products on the basis of the budgeted revenues of each product. The preceding unit costs assume Easyspread 2.0 will be introduced on October 1, 2014.

Required:
1. On the basis of financial considerations alone, should Martin introduce Easyspread 2.0 on July 1, 2014, or wait until October 1, 2014? Show your calculations, clearly identifying relevant and irrelevant revenues and costs.
2. What other factors might Gavin Martin consider in making a decision?

ladyjames123 · **Reply #1 on:** Jul 6, 2018

Answer to Question 1

C

Answer to Question 2

1. Easyspread 2.0 has a higher relevant operating income than Easyspread 1.0. Based on this analysis, Easyspread 2.0 should be introduced immediately:

Easyspread 1.0 Easyspread 2.0
Relevant revenues 165 215
Relevant costs:
Manuals, diskettes, compact discs 0 38
Total relevant costs 0 38
Relevant operating income 165 177

Reasons for other cost items being irrelevant are

Easyspread 1.0
Manuals, diskettesalready incurred
Development costsalready incurred
Marketing and administrativefixed costs of period

Easyspread 2.0
Development costsalready incurred
Marketing and administrationfixed costs of period

Note that total marketing and administration costs will not change whether Easyspread 2.0 is introduced on July 1, 2014, or on October 1, 2014.

2. Other factors to be considered:
a. Customer satisfaction. If 2.0 is significantly better than 1.0 for its customers, a customer-driven organization would immediately introduce it unless other factors offset this bias toward do what is best for the customer.
b. Quality level of Easyspread 2.0. It is critical for new software products to be fully debugged. Easyspread 2.0 must be error-free. Consider an immediate release only if 2.0 passes all quality tests and can be supported fully by the salesforce.
c. Importance of being perceived to be a market leader. Being first in the market with a new product can give Oregano Software a first-mover advantage, e.g., capturing an initial large share of the market that, in itself, causes future potential customers to lean toward purchasing Easyspread 2.0. Moreover, by introducing 2.0 earlier, Oregano can get quick feedback from users about ways to further refine the software while its competitors are still working on their own first versions. Moreover, by locking in early customers, Oregano may increase the likelihood of these customers also buying future upgrades of Easyspread 2.0.
d. Morale of developers. These are key people at Oregano Software. Delaying introduction of a new product can hurt their morale, especially if a competitor then preempts Oregano from being viewed as a market leader.