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Hello Sir, I hope you’re doing great!
I request you to explain this treatment to me as I really don’t understand why the kit has done it the way it has.”A company in the civil engineering industry with headquarters located 22 miles from London undertakes contracts anywhere in the United Kingdom.
The company has had its tender for a job in north?east England accepted at $288,000 and work is due to begin in March 20X3. However, the company has also been asked to undertake a contract on the south coast of England. The price offered for this contract is $352,000. Both of the contracts cannot be taken simultaneously because of constraints on staff site management personnel and on plant available. An escape clause enables the company to withdraw from the contract in the north?east, provided notice is given before the end of November and an agreed penalty of $28,000 is paid.The following estimates have been submitted by the company’s quantity surveyor:
(3) The plant which would be needed for the south coast contract has been owned for some years and $12,800 is the year’s depreciation on a straight?line basis. If the north?east contract is undertaken, less plant will be required but the surplus plant will be hired out for the period of the contract at a rental of $6,000.”
Sir the aforementioned paragraph is an extract from a question mentioned in Kaplan. Now i want to understand that why did we not add $6000 to north-east contract? and why just deduct 6000 as an opportunity cost from south coast contract cost statement??
I understand why the latter treatment is right, but i want to know why can’t we add 6000 to north east contract and show it as additional revenue?”
By all means add $6,000 to the north-east and do not subtract it from the south coast – the decision will not be affected at all.
but why can’t we deduct $6000 from south-coast and add this as an additional revenue under north-east too?
because technically we have to prepare a separate cost statement for each contract, and for one it is a revenue and other a lost opportunity. So why not show dual effects?
also sir in this same question are Total local contract costs of 253,520 and 264800, and they have provided no details regarding their exclusion form cost statement. Any reason for no treatment?
An opportunity cost is lost revenue. If you show it as revenue of northeast then it isn’t being lost.
I have no idea about your second post because you have not told me where to find the question.
but $6000 is a relevant benefit if we take up north-east, so why not show it as income under north-east apart from of course showing it as a relevant cost of south-coast(lost opportunity)?
Extremely sorry to bother you sir, but can you please explain that again? I mean if it has to be just the lost revenue to be included as opportunity cost, in that case it should only be deducted in south-coast and nothing in the north-east?
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