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Hi my Dear Tutor, i have a question which seems to be confusing for me.
contract requires 200 kg of material.there are 250 kg of material in stock which is not required for normal production.this material originally cost a total of $3,125.if not used on this contract the stock of material would be sold for $11 per kg.
in the answer it says since material is not required for normal production, the relevant cost of this material is NRV if it were sold.
200*11=2200
from my point of view, if it is not required for normal production meaning that no alternative use available and it will be sold at scrap value and it will be $11.
Also not used for normal production does not mean it is regularly used if it was said regularly used its relevant cost would be current market price so called replacement cost.what could be your explanation in this case?
I don’t understand your problem because what you say from your point of view is exactly the same as what the answer says.
Since it is not required for normal production if the contract were not undertaken then it would be sold for $11 per kg (the NRV) and therefore the cost of using it in the contract is the opportunity cost of the $11 per kg that they would otherwise have received.If the material was regularly used in production, then yes indeed – the relevant cost would be the cost of replacing it which would be the current cost.
I mean why it is said NRV not scrap value?how it can be nrv if it has no alternative use?
Yea yea i understood now.
3125/250=12.5
200kg per kg 11 $
if it is not used it will be sold at scrap value which its scrap value will be its NRV.2200 here will be opportunity cost.
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