CIMA P1 Syllabus C. Short-term Decision Making - Relevant Cost Of Machinery - Notes ^{4 / 4}

1. Repair costs arising from use

2. Hire charges

3. Fall in resale values arising from use

Illustration:

Wellington Corp is evaluating three options for their equipment, Machine A. One option involves upgrading the machine immediately at a cost of £7,500, which would allow the company to avoid renting a substitute machine for £19,000. However, this upgrade would result in Machine A needing to be scrapped in one year, incurring a disposal cost of £4,000. 

Ignoring the time value of money, calculate the relevant cost for this option.

Solution:

The answer is £7,500. 

Modification = £7,500, 
Hire costs avoided = £(19,000) 
Disposal costs = £4,000 
Relevant cost is a saving of £7,500.