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Which of the following costs is a relevant cost when pricing a contract at as low a price as possible?
A. Rental payments on a factory where a long lease was taken out some years ago
B. Preliminary work carried out on a feasibility study
C. Reduction in the book value of machinery over the life of the contract
.D Insurance to cover possible warranty claims against work produced.
Please reply
I thought answer is C but it is D in my revision answers.. pls confirm
The correct answer is indeed D.
A and B are sunk costs and therefore irrelevant.
C is wrong because the book value is the amount in the financial statements (cost less accumulated depreciation) which is not what the machinery is really worth.
Is the “feasibility study” a study which has ALREADY happened? I would have thought it would only have happened if the contract went ahead?
Because of this I would have thought B and D were both relevant.
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