directlyIn order to determine the relevant cost of the contract to Essential Beauty Group, we need to analyse the case facts. The following is a schedule that clearly shows the relevant cost value for each of the items identified and an explanation of how we determined each relevant cost value:
Item | Relevant Cost Value | Explanation
--- | --- | ---
Fixed Costs | £240,000 | These are costs that do not vary with the level of production. Examples include rent, salaries, and insurance. We have included these costs as they are necessary for the business to operate and are incurred regardless of the level of production.
Direct Material | £270,000 | These are costs that are directly attributable to the production of the goods or services. Examples include raw materials and packaging. We have included these costs as they are necessary for the production of the products and are directly related to the level of production.
Direct Labour | £180,000 | These are costs that are directly attributable to the production of the goods or services. Examples include wages and salaries for production staff. We have included these costs as they are necessary for the production of the products and are directly related to the level of production.
Variable Overheads | £90,000 | These are costs that vary with the level of production but are not directly attributable to the production of the goods or services. Examples include utility costs and maintenance costs. We have included these costs as they are necessary for the production of the products but are not directly related to the level of production.
Total Relevant Cost | £780,000 | This is the total of all the relevant costs.
Items that we have not considered to be relevant for this analysis are:
Sunk Costs - These are costs that have already been incurred and cannot be recovered. Examples include marketing costs and research and development costs. We have not included these costs as they are not relevant to the decision-making process for this contract as they have already been incurred.
Opportunity Costs - These are costs of lost opportunities that could have been gained by choosing an alternative course of action. We have not included these costs as they are not relevant to the decision-making process for this contract as they are not costs that are actually incurred by the business.