RELEVANT COST

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November 2, 2021 at 4:13 pm #639786
haan191215
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VB firm want to expand their business, and is about to the acquire a warehouse. The warehouse costs £130,000 to buy. The cost of the existing warehouse was £70,000 but it would now sell for £110,000. Fittings in the existing warehouse will be sold for £5,000 and a new refit for both warehouses together will cost £20,000. The cost of the refit will be depreciated at a rate of £4,000 per annum. The new warehouse will be depreciated by £7,000 per annum.The employment cost of the manager of the existing warehouse is £25,000 per annum. He will spend half his time on the new part of the expanded warehouse. An additional part-time assistant will the at a cost of £10,000. Heating and lighting for the new warehouse space will cost £6,000 per annum but there will be a saving of £1,000 on the fixed costs of the heating and lighting contracts for the existing warehouse.
Required:
Should VB firm acquire the warehouse? Explain your decision using relevant costing.

Is deprecation cost relevant in this situation?
November 3, 2021 at 5:57 am #639807
John Moffat
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No it isn’t. The cost of the warehouse is relevant and depreciation is simply spreading that cost.

(Incidentally, the second part of this question cannot be asked in the exam – you cannot be asked to write and explain something in Paper MA)
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