A firm has some material which originally cost $49,000. It has a scrap value of $12,500, but, if re-worked at a cost of $7,500, it could be sold for $17,500. There is no other foreseen use for the material.
The relevant cost of using the material for a special job is :
Nil
$12,500
$17,500
$20,000
ans 12500
Caz is considering its options with regard to a piece of machinery which cost $150,000 six years ago. The current replacement cost of that particular machine is $250,000.
Selling the piece of machinery would generate scrap sales of $160,000. Keeping the machine in-house would generate a net income of $175,000. The relevant cost of the machine is:
$150,000
$160,000
$175,000
$250,000
ans 175000
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finding relevant cost
2y ago#1First question:
If they did not use the material for the special job then they would have the choice between selling it (for 12,500) or reworking it (giving a net 10,000). They would choose to sell it because this would give them more.
So using it for the special job would lose then 12,500 and this is the relevant cost.
Second question:
Similar to the previous question, then have the choice between selling it and getting 160,000 or keeping it and earning 175,000. They would choose to keep it because it earns more at 175,000, so doing anything else with it would lose them the 175,000 and so this is the relevant cost.
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