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Dear Mr John,
Q1)Optic pointer purchase a new machine, $150000 for a contract. it has an istallment cost $25000, and expected have a scrap value of $10000 in five years’ time. The machine will be depreciated on straight line basis over 5 years. What is the relevant cost of the machine for the contract?
Q2) Tau Co has just secured a new contract which requires 500 hrs of labour.
there are 400 hrs of spare labour capacity. the remaining hrs could be worked as overtime at time and a half or labour could be diverted from the production of product X. Product X earns a contribution of $4 in two labour hrs and direct labour is currently paid at a rate of $12 per normal hour. What the relevant cost of labour for the contract?Q1. This is a slightly unfair question. The actual relevant cost is 175,000 now. However they will get back 10000 in 5 years, so the net relevant cost is 165,000.
But since the scrap would not be for 5 years and therefore would need discounting in order to make any decisions, I would go for a relevant cost of 175,000Q2. The relevant cost is 100 hours x (4/2 + 12) = $1400
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