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The $2,500 additional monthly running costs of a new machine to be purchased to manufacture an established product. Since the new machine will save on labour time, the fixed overhead to be absorbed by the product will reduce by $100 per month.
Are these costs relevant to the decision to purchase the new machine?Sir can you also explain why $100 saving is not considered as Relevant cost? Because its an additional saving so it should be considered as Relevant costing
Changing the way the fixed overheads are absorbed (charged) between various products does not change the total fixed overheads of the company – they can absorb them between their products any way they want to.
The fixed overheads would only be a relevant cost saving if the total fixed overheads of the company were to fall and there is nothing in the question to indicate that this is the case.
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