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hi,
there is two confusion for me in the question
1)they say appler is considering relevant cash flow in short term decision and in the end the question requirement is to find the total cost for proccesing and supervision through which we can take min price decision …..now relevant cash flow and total cost are two different things??2)if we have to find the cost as per requirement …..we need 500 material of A for compound 200 already in stock , out of which 10% shrink so we need 500-180=320
320×6.25=2000 plus the opportunity cost which we lost by NOT selling it in the scrap because we used it in the process which is 400 so total cost of A is 2400MATERIAL B which is aready in the stock but regularly use by the business so its directly the market price 800×3.75=3000
and the proccesing energy cost is also relevant to process 200
SO the total cost should be 5600 ( 2400+3000+200 ) but BOOK ANSWER IS 4475 ????QUESTION =
Appler is considering the relevant cash flows involved in a short-term decision. An
important client has asked for the minimum price for the processing of a compound. The
compound involves the following:
Material A: Appler needs 500 kg of material for the compound but has 200 kg in stock
present. The stock items were bought 3 months ago for $5/kg but have suffered 10%
shrinkage since that date. Material A is not regularly used in the 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.
Material B: Appler needs 800 kg of material B and has this in stock as it is regularly needed.
The stock was bought 2 months ago for $4/kg although it can be bought now at $3.75/kg
due to its seasonal nature.
Processing energy costs would be $200 and the supervisor says he would allocate $150 of
his weekly salary to the job in the company’s job costing system.
Based upon the scenario information, what is the total cost for processing and
supervision to be included in the minimum price calculation (to the nearest $)?With regard to your first paragraph, relevant cash flow and total cost are not two different things in this context. It is the total relevant cost that will determine the minimum price that can be charged for a special contract, and I do suggest that you watch my free lectures on relevant costing.
With regard to material A, the inventory has already shrunk and so your use of 180 is irrelevant. In addition, if you have typed it correctly then 400 is not the scrap proceeds. The question says that it would be disposed of at a cost to Apple of $400, so using it in the new contract is saving $400 (not costing $400).
Therefore the relevant cost of A is (300 x 6.25) – 400 = $1,475.With regard to material B, because it is in regular use the cost is indeed $3,000.
Therefore the total material cost. is $4,475.
apart from shrinkage cost i understood every thing you have explained …..my point is , as in the question it says we need 500 kg of material A for special contract and we have 200 already in stock which is irrelevant but due to shrinkage we lost 20 kgs …now we need 500-180=320 ×6.25=2000 to complete the total for the contract ????
The question says that there are 200 in stock. They will already have shrunk and are not going to suddenly shrink again.
So they will use those 200 and then buy the extra 300.
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