- November 2, 2021 at 4:13 pm #639786haan191215Member
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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.
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 #639807John MoffatKeymaster
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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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