Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 17

Cost Data for Managerial Purposes

As an analyst in an airline’s finance department, you are asked to help the operations staff. Personnel has identified a new method of loading baggage that is expected to result in a 30 percent reduction in labor time but no changes in any other costs. The current labor cost to load bags is $1.00 per bag. Other costs are $0.50 per bag.

Required

a.What differential costs should the operations staff consider for the decision to use the new method next year? What would be the cost savings per bag using it?

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b.Describe how management would use the information in requirement (a) and any other appropriate information to proceed with the contemplated use of the new baggage loading method.

Step 1 of 3

a.

The operational staff should consider only the differential costs which affect the baggage loading costs in making decision about the use of new method. The operational staff should consider the labor cost which is the only differential cost in the decision making about the new method.