Noel Stewart bought a machine two years ago for £500. He must now replace the old machine by buying a new model 206 for £700 or a used model 204 for £650. Noel has decided to buy model 204.
Noel Stewart has estimated that the total fixed costs for his department are £10,000. He also estimated that his variable cost per unit is £10.
Noel Stewart bought some materials 2 years ago for £300. These materials have simply been left in stock as they were not needed. A new customer offers to buy a product that uses these materials. The conversion cost is £500 and the customer has offered to pay £650 for the product. Noel decides to accept the order.
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In this decision, Noel would consider the relevant material cost to be:
A)£300.
B)£650.
C)£600.
D)£0.

Question

Quizplus · Accepted Answer

The relevant material cost is considered to be £0 because the materials were purchased in the past and have been left in stock, making their cost a sunk cost, which is not relevant to the decision-making process for the new order.

Noel Stewart Bought a Machine Two Years Ago for £500