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9.A Co has three options for machine B. One of these options involves modifying the machine now at a cost of $7,200, which will mean that the company does not have to hire an alternative machine at a cost of $19,800. This modification would mean that machine B would have to be disposed of in one year’s time at a cost of $4,000. Ignoring the time value of money, calculate the relevant cost of this option.
sir i reallly need your help in this question
can we consider 19800 as a relevant cost here ?
can we call it incremental cost or it is an incremental revenue…..Without seeing the whole question would seem that the 19,800 is a saving rather than a cost.
It means here
Relevant cost will be
7200+4000=11200
And
Relevant cash inflow = 19800-11200= 8600
Right ?
Or what
Need your help sirIt really depends on what the question asks for, and you have not typed out the whole question.
The relevant cost of modifying machine B and using it is 7,200 + 4,000.
This is cheaper than hiring a machine for 19,800.
However it depends on how much machine B could be sold for now (or how much it would cost to dispose of it now instead of in 1 years time).
Surely you have an answer in the same book in which you found the question? Also, full relevant costing questions are asked in Paper PM and not in Paper MA. Paper MA only asks the relevant costs for DCF investment appraisal.
One question sir
To be a relevant cost
There must be cash flow or
Non cash flow items can also be a relevant cost ?And what we called to that amount which is saved just because we didn’t accept let’s say ABA project.
Relevant costs are cash flows. If there is a cash saving then it is not given a separate name – it is a negative relevant cost.
I do not know what you mean by ‘ABA project’ !!
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