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August 27, 2019 at 8:19 am
Hi Harry, I may be just a year late in getting back to you about your concern, but as I still believe there may be other’s who share this doubt, I’ll clear it up now.
Your question is completely justified, and yes, if she were to continue purchasing and only selling the cloth for the months to come, she would incur losses of 675$/mon; which as an alternative seems to raise obvious red flags as it would be financially better to incur a one-off cost of 1400$ instead.
But if you noticed, there is a minimum notice period of 2 months that is required to be given in order to cancel the contract. Just to reiterate, if we give our notice now, we won’t incur any cancellation fee; but we will have to continue to purchase the cloth from them at the agreed-upon price for the next 2 months ONLY.
It was this point that is KEY to understanding why the ‘selling the cloth at $6.25’ option is going to be cheaper, and therefore the most suitable option to make a provision for.
March 1, 2020 at 3:58 pm
Thankyou for the explanation
August 20, 2018 at 7:47 pm
Hi, really enjoy the lectures and find them very helpful. A question on example 3 – I understand for the specific 2 months that continuing to buy and sell is the ‘cheaper’ option as shown in the example, however the chosen answer (loss of £1,350 for the 2 months) or (£675) per month will then continue every month – therefore making it a very expensive option in the long run. Why wouldn’t we choose the one off loss of £1,400 otherwise we will have to incur this loss at some point in the future anyway? Thanks for your help. Harry
September 4, 2018 at 11:08 am
Hey harry, I’m not a tutor- just student like u Based on you’re doubt why they choose 1350 is that it would give them lower losses compared to the other options (i.e either to exit the contract immidiately or make dresses and sell em) Thus an entity would obviously opt for the activity which would give them lower losses right,hence they’re would create a provision for the losses incurred by that activity.
May 7, 2019 at 5:26 am
thanks Kevin. was going to ask same question.
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