Question :
A spare parts supplier is thinking of building a car from the parts he has in his yard. He does not expect any reward for his labor but needs to know what costs he could include for the materials. He has provided the given information:
- A chassis was bought for £100 and has no scrap value.
- A reconditioned engine can cost £375. Therefore, an old engine was bought for £50. It will either be sold in its present condition for £225 or additional parts costing £250 could be bought to bring to bring the engine to an equivalent standard to the reconditioned one.
- Tyres costing £180 need to be purchased.
- Paint is in stock at a cost of £60 but it can need to be replaced at its current price of £70 this is from the instructor:
Cost of materials to prepare a car based on given information. Hint on the first bullet - "chassis bought for 100" is this relevant? For example: is the chassis a relevant cost to be counted? What does the text provide about sunk costs (this is important), cost with no future cash flow and items that have no scrap value. Is this type of material relevant when you are trying to check relevant costs? This is a simple cost identification problem. Approach - read the cost information - refer to the text to evaluate if the type of cost is relevant. Prepare a cost column and a description column - total the cost column and you have relevant costs. HINT: which cost is relevant present cost or replacement cost?