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A machine owned by a company has been idle for some months but could now be used on a one year contract which is under consideration. The net book value of the machine is £1,000. If not used on this contract, the machine could be sold now for a net amount of £1,200. After use on the contract, the machine would have no saleable value and the cost of disposing of it in one year’s time would be £800.
What is the total relevant cost of the machine to the contract?
Answer says its 2000. is it because they asked for “TOTAL” relevant cost ?
They have two options either sell it for 1200 or use and dispose for 800.
so they will take the best option right which is sell it for 1200 ??The word total is irrelevant – we are always after the total relevant cost.
If we use the machine on the contract then we have the usual opportunity cost of the $1,200 proceeds from sale that we will not be getting.
In addition at the end of the contract we will have the cost of paying to dispose of the machine and that will cost us another $800.So using the existing machine will end up costing us a total of $2,000.
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