Question 4
Reason for treatment of income/ cost chosen
Note
The cost of £18,000 is sunk and will not be affected by the decisions; it is therefore not relevant. If the tender is successful, this material will be not be available for making luxury document, thereby requiring £9,000 to be spent on material. As this is a direct consequence of the new order, it is a relevant cost.
The original cost £4,000 is sunk. The replacement of the material is an incremental cost is £6,500 and therefore it is relevant cost.
The finishing material will be required specifically for the order at current price, so this is an incremental cost.
As the skilled staff will be paid whether or not the new order is produced, this is a committed cost and is therefore not relevant. Only the additional 100 hours at £10 will be included as this is an marginal cost.
As the unskilled staff will not be paid unless the order goes ahead, this is a marginal cost and so it is a relevant cost. The deprecation charges is not included and as it’s not cash flow and is unaffected by the decision. If order goes ahead, there will be an opportunity cost as the sewing machinery will not available for hiring the machinery out which is 4 weeks at £250 per week..
This is an incremental cost to add decorative hand finishing and therefore it is relevant cost.
This is a committed cost and therefore it is irrelevant cost affected by decisions.
The £2,000 set up cost is a sunk cost, and the maintenance contracted