Question

Costs associated with two alternatives, code-named Q and R, being considered by Albiston Corporation are listed below:

	Alternative Q				Alternative R
Supplies costs	$	91,000			$	91,000
Power costs	$	55,000			$	54,200
Inspection costs	$	47,000			$	54,200
Assembly costs	$	56,000			$	56,000

Required:

a. Which costs are relevant and which are not relevant in the choice between these two alternatives?

Supplies Costs: relevant or not relevant?

Power Costs: relevant or not relevant?

Inspection Costs: relevant or not relevant?

Assembly Costs: Relevant or not relevant?

b. What is the differential cost between the two alternatives?

Answer 1

A) Relevant cost are those cost which are different in both the alternatives

Supplies cost - irrelevant as both the amount is same

Power cost - relevant

Inspection cost - relevant

Assembly cost - irrelevant

B) differential cost between both the alternatives will be those cost which are different in both the alternatives and the amount of difference between them will be the differential cost

Alternative Q - Total differential cost = 55,000+ 47,000 = $ 102,000

Alternative R - total differential cost = 54,200+ 54,200 = $ 108,400

Therefore the difference is = 108,400- 102,000 =$ 6,400