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hi Sir,
below is the information regarding the machine to be used for a special contract.
a) A special cutting machine will have to be hired for three months for the work (the length of the contract). Hire charges for this machine are $75 per month, with a minimum hire charge of $300.(b) All other machinery required in the production for the contract has already been purchased by the organisation on hire purchase terms. The monthly hire purchase payments for this machinery are $500. This consists of $450 for capital repayment and $50 as an interest charge. The last hire purchase payment is to be made in two months time. The cash price of this machinery was $9,000 two years ago. It is being depreciated on a straight line basis at the rate of $200 per month. However, it still has a useful life which will enable it to be operated for another 36 months. The machinery is highly specialised and is unlikely to be required for other, more profitable jobs over the period during which the contract work would be carried out. Although there is no immediate market for selling this machine, it is expected that a customer might be found in the future. It is further estimated that the machine would lose $200 in its eventual sale value if it is used for the contract work.
What is the relevant cost of machinery for the contract?
thanksFor part (a) the relevant cost is $300 because this is the extra cash that will have to be spent.
For part (b), the relevant cost is $200.
The reason is that all of the other costs mentioned will still be incurred whether or not we do the contract, and so the only extra cost of doing the contract is the $200 that we will lose in sales value.
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