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From ACCA technical article (Relevant Costs) , example 3 (Relevant cost of machinery).
Machine update cost:$100,000
Contribution from products:$150,000
Opportunity cost:$75,000I don’t understand how do we get the net cash outflow $25,000?
The article shows the workings in a rather confusing way!!!
If they update the machine and use it, then they will pay 100,000 to update and receive 150,000 contribution, so a net receipt of 50,000.
However there will also be the opportunity cost of the 75,000 that they could have received had they instead sold the machine.
Therefore the net relevant cost is 75,000 – 50,000 = 25,000.
(And they would therefore be better selling the machine and getting 75,000 rather than updating and using it which only gets them 50,000).
Have you watched my free lectures on relevant costing? The lectures are a complete free course for Paper PM and cover everything needed to be able to pass the exam well.
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