(a) Define and illustrate the following costs in the context of decision making: (0) (ii) (iii) Relevant costs Sunk costs Opportunity costs 6 Marks (b) STAFFORD Plc ("STAFFORD") is considering whether to accept or reject a new contract. The Management Accountant in the Contract Estimating Department has spent fifteen hours preparing costs and has arrived at a cost estimate of / 45,000. The estimate shown below indicates that a loss will occur. / Material A - already in stock (original cost). Material B - ordered. Material C-ordered.. Labour Contract Department costs (10 hours preparation) Depreciation on machinery already owned.. Headquarters costs allocated. 3,000 2,500 1,000 12,500 1,000 10,000 15,000 45,000 32,000 13,000) Contact price. Profit / (loss) The following additional information is available: (0) Material A was purchased two years ago. Currently if sold it would realize / 2,500 but alternatively could be used on another contract as substitute for a material which will cost / 2,800. (ii) Material B was previously ordered for a contract which has now been cancelled. It is not possible to cancel the order. It could be resold for /2,100. (iii) A minimum amount of 2,000 kgs of Material C must be ordered at a cost of /1 per kg. The contract will require 1,000kgs but there is no alternative use or resale value for the remainder. (iii) The labour cost includes /5,500 for wages for the foreman who will be employed whether the contract is accepted or not. The remaining workers will be paid off immediately if this contract is not accepted and the redundancy costs involved will amount to / 10,000. It is expected that they will not be required when the contract is completed but the redundancy costs will increase to / 12,000. (iv) The machinery cost /40,000 and was expected to last for four years. It is two years old and could be sold for /12,500 now or for / 6,000 at the end of the contract under consideration. (v) Fixed headquarters costs amount to /150,000 each year. There are usually ten contracts being supervised at the same time. Requirement Advise STAFFORD whether it should accept the contract or not. Fully explain the reasoning and assumptions for any changes you make to the original costing. 14 Marks