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George plc is considering whether to accept a new contract. The machinery that would be used to
produce the goods for the contract was purchased seven years ago at a cost of $80,000, with an
estimated life of ten years. The machinery has been idle for some time and if not used on this contract
would be scrapped and sold immediately for an estimated $5,000. After use on this contract the
machinery would have no value, and would have to be dismantled and disposed of at a cost of $1,500.
What is the relevant cost of the machine to the new contract? (to the nearest whole $)why is the answer $6500?
If they use the machine on the contract they will lose 5,000 scrap proceeds that they would otherwise have received. In addition they will have to pay 1,500 to dismantle the machine. The total of the two is 6,500.
Hi Sir, I have one question in relevant costing about materials. This is the question 128 in the new BPP revision kit. They have considered 7600 as a cost of the computerized control system. Why we need to consider this as price when the current price of the Swipe 2 machine is 10,800.
Because it is cheaper for them to use (and modify) the Swipe 1 than buy a Swipe 2. They would always choose to do whichever was the cheapest option.
Have you watched my free lectures on relevant costing?
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