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QUESTION: A company is considering accepting a one-year contract which will require four skilled employees. The four skilled employees could be recruited on a one-year contract at a cost of $40,000 per employee. The employees would be supervised by an exisiting manager who earns $60,000 per annum. It is expected that supervision of the contract would take 10% of the manager’s time.
Instead of recruiting new employees the company could retrain some existing employees who currently earn $30,000 per year. The training cost would be $15,000 in total. If these employees were used they would need to be replaced a total cost of $100,000.
Sir answer is 115000
But i feel that it should be (115000)+160000
Because sir since it saves the salary to new employee so it should be incremental cost
And hence 115000 will be incurred and 160000 will be saved
Sir please explain me this problemThey have two choices.
Either recruit new employees which will cost them 160,000, or alternatively train and replace existing employees which will cost them a total of 115,000.
They will do whichever is the cheapest, which is to train and replace the existing employees, and so the cost of doing the contract is just the 115,000.
(If it had been cheaper to recruit new employees then they would choose to do that and the relevant cost of doing the contract would be the cost of the new employees)
9.A Co has three options for machine B. One of these options involves modifying the machine now at a cost of $7,200, which will mean that the company does not have to hire an alternative machine at a cost of $19,800. This modification would mean that machine B would have to be disposed of in one year’s time at a cost of $4,000. Ignoring the time value of money, calculate the relevant cost of this option.
Sir then in this question there are two options
1 cost 7200+4000
2 cost 19800
Then 1 is cheap so we should select it
But here answer is
7200+4000-19800This is a silly question because it says that there are three options but only gives two of them (hiring a machine or modifying the machine). Also, if they hired a machine then the existing machine would presumably be disposed of now, but the question does not give the cost of disposing now (which would be relevant to the decision).
Certainly of the two choices and on the information given, the best option would be to modify the machine and the relevant cost would be 15,800. Only if it had to be one of the two choices would modifying the machine give a saving of $8,600 as against not modifying the machine.
Whatever, the best option would be to modify (and the only purpose of relevant costing is to decide on the best option).
(Also, this cannot really be asked in Paper MA because full relevant costing is not asked any more in Paper MA and is not asked until Paper PM. I don’t know which book you found the question in, but it shouldn’t really be there 🙂 )
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