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can you please help me?
A company purchased a machine several years ago for £50,000. Its written down value is now £10,000. The
machine is no longer used on normal production work and it could be sold now for £8,000.
A one-off contract is being considered which would make use of this machine for six months. After this time the
machine would be sold for £5,000.
What is the relevant cost of the machine to the contract?
A £2,000
B £3,000
C £5,000
D £10,000If they do the contract, they are receiving scrap of 5000, but they are losing the scrap of 8000 that they could have received now if they had not done the contract.
So the relevant cost is the difference of 3000.Dear Tutor,
I understand the above answer but got confused, why we can’t compare Higher of scrap value and alternative use?? In which condition do we compare.
while calculating Relevant cost of material when material have alternative use. Its RC is higher the value of scrap or Alternative use. In this question he can sold now in 8000(scrap) but after 6th month he can sold it for 5000(when we use alternative or use further) so higher is 8k which is our Relevant cost… why can’t this logic work over here
In kaplan book No. 76 A company is calculating the relevant cost of the material to be used on a particular contract. The contract requires 4,200 kgs of material H and t his can be bought for $6.30 per kg. The company bought 10,000 kgs of material H some t ime ago when it paid $4.50 per kg.
Currently 3,700 kgs of t his remains in inventory. The inventory of material H could be sold
for $3.20 per kg.
The company has no other use for material H other than on t his contract, but it could be
modified it at a cost of $3.70 per kg and use it as a subst itute for material J. Material J is
regularly used by the company and can be bought for $7.50 per kg.
What is the relevant cost of the material for the contract?Here we compare Higher of alternative use $3.8 (7.5-3.7) with scrap value $3.2. and the answer is 3.8*3700 + 500*6.3 = $17210
but can’t we the same logic here also.Kindly explain above query
Thank you
Questions such as this are no longer asked in Paper MA – they are examined in Paper PM.
However the logic is no different.
They have 3,700 kg in inventory. If they do not use in the new contract they can modify it and doing this would save them $3.80. By using it in the contract they will not be able to make the saving and so it will effectively cost them $3.80 per kg (which would be better than buying at $6.30 per kg).
They only have 3,700 in inventory and so they would have no choice but to purchase the remaining 500 kg at a cost of $6.30 per kg).
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