Page 85 - P1 Integrated Workbook STUDENT 2018

Relevant costs and decision making

Example 3

Calculate whether or not Robson should convert the product.

Solution

The original expected fee and cost are no longer relevant, they are sunk. Only
the incremental revenue and costs need to be considered:
$
Revenue 85,000
Material A (2,150)
Material B (5,500)
Skilled labour (24,000)
Unskilled labour (30,000)
Machine (15,000)
––––––
Relevant benefit or cost of the conversion 8,350
––––––
The relevant value is positive therefore the conversion should be undertaken

Illustrations and further practice

Now try examples 8 to 12 from Chapter 6 as well as Illustration 1.

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