Question 1 (25 Marks)

The classification of costs between relevant costs and irrelevant costs is important in the context of managerial decision-making.

1. Explain the concept of both relevant and irrelevant costs, providing a clear and appropriate example for each concept. (5 Marks)
2. Discuss the importance of distinguishing between relevant and irrelevant costs for the purpose of decision making. Provide at least three criteria in which relevant vs irrelevant classification differ from each other. (8 Marks)
3. Company A is using a two-year-old machine costing $24,000. The company uses straight-line depreciation, while the machine has a useful life of 10 years. Company A is considering buying another machine costing $45,000 with a useful life of 9 years. The new machine wont have any effect on the number of units that a company produces. Company A, however, expects the variable cost to come down from $34,000 to $22,000. Fixed costs will also be the same at $20,000. Using the above information, determine which are relevant and which are irrelevant and the cost implication for the company. Provide a justification for your choice. (12 Marks)