Hi all. I need some help in determining if some costs are relevant. Below is the case:
A full-service airline company is planning to launch a subsidiary branch that offers low-cost flight services. The costs associated with are as follows:
New equipment costing £1,500,000 will need to be bought and will be depreciated on a straight-line basis over ten years
A manager who earns £100,000 per year and currently works for the parent company on a full-time basis will be required to spend 25% of his time managing the new budget airways.
Can someone tell me if the following costs are relevant or irrelevant, and why?
- the cost of new equipment
- depreciation on the new equipment and
- manager’s salary
Thank you in advance.
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Identifying relevant cost
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5y ago#1Why are you attempting questions for which you do not have an answer? You should be using a Revision Kit from one of the ACCA approved publishers - they contain answers and explanation.
Since you have asked this in the AFM forum, I assume they are making the decision based on the NPV. In which case the cost of the new equipment is relevant, the depreciation is not relevant (because it is not a cash flow) and the manager's salary is not relevant (because there is no extra cash flow).
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