A hardware store is considering purchasing the shop next door to expand capacity. The shop next door will cost £140,000 to buy. The cost of the existing shop was £80,000 but it would now sell for £120,000. Fittings in the existing shop will be sold for £5,000 and a new refit for both shops together will cost £20,000. The cost of the refit will be depreciated at a rate of £4,000 per annum.

The new shop will be depreciated by £7,000 per annum.

The employment cost of the manager of the existing shop is £30,000 per annum. She will spend half her time on the new part of the expanded shop. An additional part-time assistant will be employed at a cost of £12,000 per annum. Heating and lighting for the new shop space will cost

£6,000 per annum but there will be a saving of £1,000 on the fixed costs of the heating and lighting contracts for the existing shop.

Required

(1) Explain the meaning of ‘relevant costs’.

(2) Explain the use of relevant costs in making the decision on whether to expand the hardware shop.