The organizations strive to earn short-run profits. In making short-run decisions, not all cost and revenue data
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Question:
On the revenue side, the only relevant revenue is the incremental & differential revenue.
Relevant and Non-Relevant Costs:
1.Future Costs and Sunk Costs (IR): A future Cost is that cost yet to be incurred and since the decision is in the future, future costs are relevant.
A sunk cost is a historical cost which has already been incurred and cannot be reversed hence irrelevant for decision-making.
2.Incremental Costs and
The sales department has found another company willing to buy the machine for £34,000 once it has been completed.
To complete the work, the following costs will be incurred:-
(a)Materials: These have been bought at cost of 60,000. They have no other use and if the machine is not completed, they will be sold for scrap at £2,000.
(b)Further labour costs would be £8,000. Labour is in short supply and if the machine is not complete, the workforce would be switched to another job and would earn £30,000 in revenue and incur £12,000 and absorb fixed overheads of £8,000.
c) Consultancy Fees £4,000: If the work is not completed, the consultancy will be cancelled at a cost of £1,500.
d) General overheads of 8,000 would be added to cost of additional work.
Required:
Assess whether the new customer’s offer should be accepted clearly bringing out the reasons for inclusion or exclusion of any costs.
Related Book For
Smith and Roberson Business Law
ISBN: 978-0538473637
15th Edition
Authors: Richard A. Mann, Barry S. Roberts
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