Company purchased some equipment several years ago for $50,000. Its net book value is now $10,000.
Company has been offered a one off contract which would make use of this piece of equipment for six months. After this time the equipment would be sold for $5,000.
What is the relevant cost of the equipment to the contract?
My answer:
$3,000- as this machine would still be sold off eventually for $5,000. The cost the company would have to incur is the lost in sales of $3,000.
The model answer:
$8,000, as it is a greater option as a opportunity cost.
Why is this so? Is the model answer wrong? I have done a similar question in Kaplan revision kit using my way of answering and gotten it right. This IS really confusing!
Taken from LSBF mock exam 2016.
Ask the Tutor ACCA PM
Relevant cost
10y ago#1I do not think you have typed the whole question, because I have no idea where you are getting $3,000 from.
I don't have LSBF's mock exam, but if you type the whole question then I will be able to explain.
I'm sorry- missed this one line out.
"The machine could be sold off at $8,000 if the company decides to sell it now."
10y ago#3On the basis of what you have typed, the relevant cost is certainly $3,000 and not $8,000.
Alright, thank you!
10y ago#5You are welcome :-)
Sign into reply to this topic.