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Hi Mr John…I find it very hard to determine relevant irrelevant costs..
A machine owned by a company has been idle for some months but could now be used on a year contract which is under consideration.The net book value of the machine is 1000$ .If not used on this contract,the machine could be sold now for a net amount of 1200$.After use on the contract ,the machine would have no saleable value and cost of disposing of it in one year’s time would be 800$.
What is the total relevant cost of machine to the contract?
Can you show me how to solve and approach this kind of questions.One more thing Could you explain what the cost of disposal is as well….
Thank you very much…The cost of disposal means that they have to pay 800 to remove it.
If they did not do the contract then they would sell the machine for 1,200.
So doing the contract loses them 1,200 they could have received and also means that they will have to pay out 800 to remove it later.
So in total, the cost of using this machine is 2,000.
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