ExpertHard2 marksMultiple Choice
ACCA · Question 18 · Decision-making techniques
Section B - Case 1: AquaHarvest
AquaHarvest operates a sustainable offshore kelp farm. For the special cosmetics contract, a specialized drying machine is required. AquaHarvest owns a suitable machine that was purchased 3 years ago for $50,000. Its current net book value is $20,000. If not used for this contract, the machine could be sold today for $15,000. After the contract, the machine will have no resale value and will cost $2,000 to dismantle and dispose of.
What is the relevant cost of using the drying machine for the special contract?
Section B - Case 1: AquaHarvest
AquaHarvest operates a sustainable offshore kelp farm. For the special cosmetics contract, a specialized drying machine is required. AquaHarvest owns a suitable machine that was purchased 3 years ago for $50,000. Its current net book value is $20,000. If not used for this contract, the machine could be sold today for $15,000. After the contract, the machine will have no resale value and will cost $2,000 to dismantle and dispose of.
What is the relevant cost of using the drying machine for the special contract?
Answer options:
A.
$15,000
B.
$17,000
C.
$20,000
D.
$22,000
How to approach this question
Identify the cash flows that change as a direct result of accepting the contract. Consider opportunity costs and future unavoidable cash flows.
Full Answer
B.$17,000✓ Correct
The relevant cost of the machine is the opportunity cost of using it plus any future cash flows caused by its use.
Opportunity cost (lost sale proceeds today) = $15,000.
Future disposal cost (incurred only if used) = $2,000.
Total relevant cost = $15,000 + $2,000 = $17,000.
The original purchase price ($50k) and NBV ($20k) are sunk/irrelevant.
Common mistakes
Using the Net Book Value ($20,000) or forgetting to add the disposal cost.
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