Question

(a) A construction firm is in the middle of constructing as office building having spent Sh.1...

(a) A construction firm is in the middle of constructing as office building having spent Sh.1 million on it so far. It requires an additional Sh.0.5 million to complete construction, because of a downturn in the real estate market, the finished building will not fetch its original intended price, and is expected to sell for only Sh.1.2 million. Based on relevant cost what is the correct course of action for the firm?

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Answer #1

Construction cost of Sh. 1 million has already been incurred. It is now irrelevant cost.

Additional cost to be incurred for complete construction is Sh. 05 million.It is relevant cost for deciding course of action.

Revenue from finished building is Sh. 1.2 million. It is Relevant revenue for deciding course of action.

So, Additional or Relevant profit = Relevant Revenue - Relevant cost

Sh. 1.2 million - 0.5 million

= Sh. 0.7 million

So, relevant profit is Sh. 07 million for completing the building. So Based on relevant cost building should be completed and then sold.

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