Question

Q.3 a Within the context of the manufacturing environment, explain the terms (i) Relevant cost (ii) Opportunity cost (iii) Contribution to profit (6 marks)

Answer 1

1. A relevant cost is a cost that only relates to a specific management decision, and which will change in the future as a result of that decision. The relevant cost concept is extremely useful for eliminating extraneous information from a particular decision-making process. In manufacturing terms by deciding the right raw materials for production can help a firm to eliminate unnecessary cost.

2. An opportunity cost is defined as the value of a forgone activity or alternative when another item or activity is chosen. So in manufacturing, a manager or a firm also has to take a decision by selecting a proper alternative in limited resources for efficient production

3. Contribution profit margin represents the incremental profit generated for each product/unit sold and is computed as the selling price per unit minus the variable cost per unit.