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Hi
I am hoping someone can help me with a question regarding Relevant Costing and Investment Appraisal. I have a question where you are advising a board of directors whether to proceed with a manufacturing project.
The question tells you that you need to rent premises at £600k per annum to do this; but 10% of these premises will be used for the storage of another unrelated item as the current storage for that item is unsuitable.
This means I either charge £600k per year or £540k per year.
I planned to charge the entire £600k per annum because the premises are needed to enable production. Am I wrong?
Can anyone help please?
Thanks
I think given the above information you are absolutely right to only consider the six hundred thousand to be the relevant cost in your calculation. The only way the storage of the unrelated item would factor into the decision would be if information were given in the question suggesting an alternative cash flow cost related to keeping unrelated items in their present location.
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