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Problem 13.44 (Relevant cost analysis and different pricing options). (a) Explain with illustrative example the following cost concepts: (i) Relevant Cost; (ii) Sunk Cost; (iii) Opportunity Cost. (b) Magic Carpets Associates have just developed new carpet design with the brand name Arabian Nights. Sales demand is very difficult to predict but is very much dependent upon the selling price. At a price of Rs. 30 per square meter it is estimated that the annual sales demand would be between 50,000 and 90,000 sq. metres per annum. At a price of Rs. 40 per sq. metre, sales demand would have between 34,000 and 44,000 sq. metres per annum. As regards cost at production volumes of 45,000 sq. metres or less per annum, attributable fixed costs would be Rs. 2,12,000 per annum and variable costs would be Rs. 32 per sq. metre. At higher, production volumes, attributable fixed costs would increase to Rs. 3,08,000 but variable costs per sq. metre would be only Rs. 24. 'Arabian Nights' has been developed at a cost of Rs. 80,000. When the product is marketed, an amount of Rs. 70,000 per annum will be charged to the operation towards Head Office Expenses. The production of the new carpet will have to be supervised by foremen. In order to find time for supervision he has to give up work in another department, for which he is paid a salary of Rs. 1,000 per month. The production of Arabian Nights' would be under taken, of course, in a division of the factory which is at present rented out to M/s Shine or Rain Ltd., Umbrella makers for an amount of Rs. 10,000 per quarter. You are required to calculate the margin of safety, as a percentage of expected sales volume at both the maximum and minimum sales volume for the two price levels and decide selling price per sq. metre