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KALPLAN RK QN.44-RELEVANT COSTING OF MATERIALS
44) H has in inventory 15,000 kg of M, a raw material which it bought for $3/kg five years ago,
for a product line which was discontinued four years ago. M has no use in its existing state
but could be sold as scrap for $1.00 per kg. One of the company’s current products (HN)
requires 4 kg of a raw material, available for $5.00 per kg. M can be modified at a cost of
$0.75 per kg so that it may be used as a substitute for this material. However, after
modification, 5 kg of M is required for every unit of HN to be produced.
H has now received an invitation to tender for a product which could use M in its present
state.
What is the relevant cost per kg of M to be included in the cost estimate for the tender?
A $0.75
B $1.00
C $3.00
D $3.25
ANS :D,HERE WHAT DOES “IT’S PRESENT STATE MEANS” AND,HOW THE SCRAP VALUE CONSIDERED !HOW THE MOST SUITABLE RELEVANT COST CHOOSEN BETWEEN THE “RESALE VALUE” OR “VALUE IN USE”,CAN WE CHOOSE THE
HIGHEST VALUE !HOW IT CAN BE APPLIED HERE!
THANK UIn future you must ask in the Ask the Tutor Forum if you want me to answer – this forum is for students to help each other. (Also, please do not type in capital letters!).
‘present state’ means without modifying it.
Initially, ignore the new contract. In which case for their existing product (HN) they can either buy 4kg or material per unit at $5, so a total of $20 per unit, or modify M and use that, which will cost 5 kg x $0.75 = $3.75 per unit.
Therefore they would prefer to use material M to produce the existing product (HN).
If they do the new contract and use material M for it, then they will be forced to buy material specially for the existing product (HN) which will mean them having to pay an extra $20 – $3.75 = $16.25 per unit. Since each unit would have used 5kg of material M, the extra cost per kg of M is 16.25/5 = $3.25 per kg (so this is the relevant cost of using it for the contract).
(The scrap value of M is not relevant, because they would not be scrapping it whatever happened – even if there was no new contract, it would be better to use it for HN rather than scrap it and only get $1 per kg.)
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