Question

29) Sheldon Company is trying to decide which one of two contracts it will accept. The costs and revenues associated with each are listed below: Contract A Contract B Contract Revenue $ 200,000 $ 260,000 Materials 10,000 10,000 Labor 88,000 120,000 Depreciation on Equipment 8,000 10,000 Cost Incurred for Consulting Advice 1,500 1,500 Allocated Portion of Overhead 5,000 3,000 The equipment was purchased last year and has no resale value. Which of these amounts is relevant for the selection of one contract over another

Answer 1

Answer:

So, the relevant cash flows are Revenue, materials and labour cost.

Explanation:

A relevant cashflow is that which is future cash cost/revenue which arises as a direct consequence of a decision. For a cost or revenue to be considered a relevant cashflow it must satisfy the following conditions:

1) Futuristic 2).Cash based   3)Incremental

Relevant cash flows for the contracts are set down below:

                                             $                          $

Revenue                        200,000                260,000

Materials                         (10,000)                 (10,000)

Labor                             (88,000)                (120,000)

Net cash flow                  102,000                130,000          

Depreciation is not a cash item, the consulting advice fee is already a sunk cost. Apportioned overhead is also not a direct cost but sunk

So, the relevant cash flows are Revenue, materials, labour