Exercise 9.4. Explain what is meant by special pricing decisions.

Answer: The special pricing decision is the price outside the main market which involves
one-time-only orders or orders at a price below the prevailing market price.

Exercise 9.11. Explain the circumstances when the original purchase price of materials is
irrelevant for decision-making.

Answer: The inventories that are taken from existing inventories are the original purchase
price which is also known as sunk cost and the sunk cost is irrelevant cost. So, the original
purchase price of materials become irrelevant for decision making.

Exercise. 9.12. Why does the relevant cost of labour differ depending on the circumstances?

Answer: The relevant cost of labour differs depending on the circumstances because when a
company has temporary spare capacity and the labour force is to be maintained in the short
term, the direct labour cost incurred will remain the same for all alternative decisions. So, the
direct labour cost will therefore be irrelevant for short-term decision-making purposes.
Whereas in a situation where casual labour is used and where workers can be hired on a daily
basis, a company may adjust the employment of labour to exactly the amount required to
meet the production requirements. Here, the labour cost will increase if the company accepts
additional work, and will decrease if production is reduced. In this situation, the labour cost
will be a relevant cost for decision-making purposes.

Exercise 9.16 A company has just secured a new contract which requires 500 hours of
labour. There are 400 hours of spare labour capacity. The remaining hours could be worked
as overtime at time-and-a-half or labour could be diverted from the production of product X.
Product X currently earns a contribution of £4 in two labour hours and direct labour is
currently paid at a rate of £12 per normal hour.
What is the relevant cost of labour for the contract?
(a) £200
(b) £1200
(c) £1400
(d) £1800

Answer: The relevant cost of alternative labour cost = (100 hours * £12= £1200)
The loss contribution = (100/2 * £4=£200)
The relevant cost of labour for the contract = The relevant cost of alternative labour
cost + The loss contribution
= £1200 + £200
= £1400. (C)
Exercise 9.17 X plc intends to use relevant costs as the basis of the selling price for a special
order: the printing of a brochure. The brochure requires a particular type of paper that is not
regularly used by X plc although a limited amount is in X plc’s inventory which was left over
from a previous job. The cost when X plc bought this paper last year was $15 per ream and
there are 100 reams in inventory. The brochure requires 250 reams. The current market price
of the paper is $26 per ream, and the resale value of the paper in inventory is $10 per ream.

The relevant cost of the paper to be used in printing the

brochure is:
(a) $2500
(b) $4900
(c) $5400
(d) $6500
Answer:
The relevant cost of the materials in inventory = 100 reams * $10 per ream
= $1000
Additional ream needed to purchase = 250 reams – 100 reams
= 150 reams
Cost for additional ream = 150 reams * $26
= $3900
The relevant cost of the paper to be used in printing the brochure = The relevant cost of the
materials in inventory + Cost for additional ream
= $1000 + $3900
= $4900. (B)
Exercise 9.18 All of a company’s skilled labour, which is paid £8 per hour, is fully employed
manufacturing a product to which the following data refer:
£ per unit £ per unit
Selling price 60
Less Variable costs:
Skilled labour 20
Others 15

Contribution (35)
25

The company is evaluating a contract which requires 90 skilled labour hours to complete. No
other supplies of skilled labour are available.

What is the total relevant skilled labour cost of the contract?

(a) £720
(b) £900
(c) £1620
(d) £2160
Answer: Contribution per unit = 25
Labour cost per unit = 20
Labour cost per hour = 8
Hours per unit = 20/8 = 2.5 hrs/unit
Contribution/ labour hour = 25/2.5 = 10
Contribution lost/ labour hour = 10
Total contribution lost = 10 *90 = 900
Labour cost (total) = 9*8 = 720
Relevant cost = 900 + 720 = 1620