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Hello! I was solving a question in the BPP kit:
The production director has suggested the following change for the costing of the
new unit:
Currently material costs are 20% of the variable production costs per unit. One of the materials used is stainless steel which is budgeted at $2,000 per unit but an alternative corrosion-resistant metal costing 25% less can be used. The production director believes a 15% discount can be negotiated for the remainder of the materials.
What would be the revised material cost per unit (to the nearest whole $)?Solution:
The correct answer is $6,940
Current variable material cost per unit = 20% x $42,000 = $8,400
Revised variable material cost per unit = (85% x ($8,400 – $2,000)) + (75% x $2,000)
= $6,940I understand the calculation for (75% x $2000) but do not understand as to why we subtract $2000 from $8400 and multiply it with 85%?? Why is $8400 included in the revised cost calculation anyways?
Please let me know, thank you in advance!The reason we subtract $2,000 from $8,400 and multiply it by 85% is because the production director believes a 15% discount can be negotiated for the remainder of the materials.
So this means that the cost of the alternative corrosion-resistant metal will be 85% of the difference between the current variable material cost per unit ($8,400) and the budgeted cost of stainless steel ($2,000).
The remaining 75% of the budgeted cost of stainless steel is added to account for the other materials. This calculation gives us the revised variable material cost per unit of $6,940.
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