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Ace limited is considering a new project that will require the use of a currently idle machine. The machine has a current book value of $12000 and a potential disposal value of $10500 (before $200 disposal costs) and hence has been under depreciated by $1500 over its life to date. If the machine is to be fit for purpose on the new project it will have to be relocated at a cost of $500 and refitted at a further cost of $800.
What is the relevant cost of using the machine on the new project?
Here i was thinking, i have two option : either dispose it and get 10300 or relocate and use it at 1300 . Better is getting 10300 right
But the answer adds both of numbers. Can u help me here
When we do materials relevant costing we always find which is the better option right
If they are relocating they are losing 10,500 that they would otherwise have received by having sold it, and in addition they are having to spend 1,300 in relocating and refitting.
So the total relevant cost is 11,800.
(Relevant costing as a separate topic was removed from the MA syllabus many years ago and is now examinable in Paper PM. Having said that, small elements of it are still examinable as part of investment decision making.)
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