Page 79 - P1 Integrated Workbook STUDENT 2018

Relevant costs and decision making

Using the machine elsewhere would generate $20,000 (the scrap value of
$12,000 is not relevant as the machine has a higher value from being used
than being scrapped). This is the opportunity cost.

However, the machine is not scarce. A replacement machine can be bought
for $15,000. This is lower than the opportunity cost and therefore it is
worthwhile buying a replacement machine. The relevant cost of using the
machine in the project is $15,000.

Central overheads

There is no indication that these costs will change because of the conversion
project. These costs have no incremental element and non-incremental costs
are not relevant for decision making. The relevant cost is $0.

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