Question

quipment owned by a company has a net book value of €1800 and has been idle...

quipment owned by a company has a net book value of €1800 and has been idle for some months. It could not be used on a 6 months contract which is being considered. If not used on this contract, the equipment would be sold now for a net amount of €1900. After use on the contract, the equipment would have no saleable value and would be dismantled. The cost of dismantling and disposing of it would be €700.What is the total relevant cost of the equipment to the contract?

a.

€2800
b.

€2100
c.

€2400
d.

€2600
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Answer #1

The right option is " d. €2,600".

Total relevant cost of the equipment to the contract = sale value of the equipment + cost of dismantling and disposing = €1,900 + €700 = €2,600.

Net book value of the equipment is not considered as it is a sunk cost which had been incurred in the past and it has no relevance to the contract.

Whereas, the sale value of the equipment becomes a relevant cost as it represents the lost opportunity which would otherwise be available to the company if the equipment was not used on the contract.

The cost of dismantling and disposing also becomes a relevant cost as it would be incurred only if the equipment is used on the contract.

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