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Hi John,
Can you help me with the following, please?
Material A: Appler needs 500 kg of material for the compound but has 200 kg in stock present. The stock items were bought 3 month ago for $5/kg but have suffered 10% shrinkage since that date. Material A is not regularly used in business and would have to be disposed of at a cost to Appler of $400 in total. The current purchase price of Material A is $6.25/kg.
The answer in the book subtract the $400 from the cost. Should it not be added? Then the calculation would be (300kg x $6.25) + $400 = 2275. But the book shows (300kg x $6.25) – $400 = 1475.
The answer is correct (I think that you have read the question too fast 🙂 )
If they were going to be able to sell the inventory for $400 then you would have been correct.
However, they are not going to sell it – they will have to pay $400 to dispose of it.So using it in the compound is not costing them anything – it is actually saving them money 🙂
Hi Mr John,
But what about the statement which says ” but have suffered 10% shrinkage since that date”,
doesn’t this reduce the quantity available by 10% ???
Thanks a lot ,
That is a trick. The question says they have 200kg in stock at present. It will have shrunk since they bought it, so presumably they actually bough more than 200kg originally.
However that is not relevant – all that is relevant is that they do have 200kg there are the moment.Hi John,
Thank you so much for your explanation!
I will pay more attention next time they say cost to disposal 😉
Can’t believe exam is on Monday. I’m so scared! Haha
Well.. 4 days of practising left!
Thanks again!
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