a) State whether each of the above is relevant or irrelevant to the decision to accept this order.

Materials

The relevant cost for material A is its purchase price of €20,000. Material B is already in stock and thus its original costs is a suck cost and its irrelevant to the decision. However by using material B we forego the necessity of disposing of this material at a cost of €1,500. This cost saving is relevant to the decision.

Labour costs

The direct labour costs is relevant to the decision. The specialist labour costs of €10,000 is irrelevant as this is provided by in-house staff. However they will need to be replaced and this replacement cost is relevant to the decision. Thus the €13,000 replacement cost of labour is relevant to the decision.

Foreman’s salary

The existing salary does not change as a result of the decision and thus it is irrelevant.

Machinery

The original cost and net book value of the machinery is irrelevant to the decision as it is a sunk cost. However as a direct result of using the machinery on the job the business will not be able to sell the machinery and this will result in a reduction in future cash flows of €10,000 (€15,000 - €5,000)

Overheads

These costs are non-incremental and thus are irrelevant to the decision

b) Recommend to the c ompany, based on quantitative information, whether the company should accept this order based on the agreed price of €100,000.

As the project shows a profit the company should accept the order unless there are better opportunities available, or non-quantifiable factors exist, that would indicate otherwise.