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Chapter 2

Question 3

Relevant costs

Various items in relation to a project are:

Market research costs of $50,000 that have been carried out.

The purchase of an asset that would cost $95,000.

The sale of that asset at the end of the project for $10,000

Depreciation of the asset over the life of the project of $85,000.

Sales revenue per annum of $65,000

Variable costs of $34 per unit produced.

Factory fixed costs of $18,000 per year that will rise to $21,000 per year for the
life of the project.

Apportioned head office costs of $2 per unit representing the project’s share of
existing head office costs.

Which of these items are relevant cash flows?

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