[Wonderer]

Dear Tutor,

I understand the above answer but got confused, why we can’t compare Higher of scrap value and alternative use?? In which condition do we compare.

while calculating Relevant cost of material when material have alternative use. Its RC is higher the value of scrap or Alternative use. In this question he can sold now in 8000(scrap) but after 6th month he can sold it for 5000(when we use alternative or use further) so higher is 8k which is our Relevant cost… why can’t this logic work over here

In kaplan book No. 76 A company is calculating the relevant cost of the material to be used on a particular contract. The contract requires 4,200 kgs of material H and t his can be bought for $6.30 per kg. The company bought 10,000 kgs of material H some t ime ago when it paid $4.50 per kg.
Currently 3,700 kgs of t his remains in inventory. The inventory of material H could be sold
for $3.20 per kg.
The company has no other use for material H other than on t his contract, but it could be
modified it at a cost of $3.70 per kg and use it as a subst itute for material J. Material J is
regularly used by the company and can be bought for $7.50 per kg.
What is the relevant cost of the material for the contract?

Here we compare Higher of alternative use $3.8 (7.5-3.7) with scrap value $3.2. and the answer is 3.8*3700 + 500*6.3 = $17210
but can’t we the same logic here also.

Kindly explain above query

Thank you

[Author]

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