EXERCISE: RELEVANT COSTING (ZAKAT BERHAD) Zakat Bhd has completed making a special machine for Fitrah Bhd. However, before delivery could be made, Fitrah Bhd was declared insolvent. Fortunately, Zakat Bhd found a potential buyer for the completed machine. The potential buyer has requested Zakat Bhd to modify the machine to suit his production requirement. The costs already incurred to date on the machine were as follows: Direct material RM 38,000 Direct labour 24,000 Variable production overhead 6,000 Fixed production overhead 20,000 Fixed admin and selling overhead 4,000 92,000 The following additional information is available: 1. 2. 3. 4. 5. 6. The original machine used two types of materials A and B. If the machine is not modified, material A could be sold as a scrap for RM6,000. On the other hand, material B will need to be disposed at a cost of RM1,200 to Zakat Bhd. Additional material required to modify the machine is RM6.400. This material is currently available in store. If it is not used for the modification, this material could be used in the production of another machine in place of materials that would currently costs RM7.200 to be bought. The modification will be carried out in two departments. The direct labour required for the modification in these departments is as follows: Department X: 3 men for 4 weeks Department Y: 1 man for 4 weeks Department X is very busy and the workers are currently paid RM150 per man per week. Additional temporary workers can be obtained at the rate of RM180 per man per week. Department Y has excess capacity and the employees are paid a standard wage of RM120 per man per week, irrespective of work done. Variable overhead is absorbed based on 20% of relevant labour wages cost. An additional supervisor will be employed at a cost of RM1,800 during the course of doing he modification work. Special tools needed for the modification can be hired at a cost of RM2,500. Required: a. Calculate the relevant cost to modify the machine. b. Briefly explain the reason for every cost item on why is it relevant or not relevant. a. Determine the minimum price of the modified machine to be quoted to the potential buyer