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An organisation is considering the costs to be incurred in respect of a special order opportunity. The order would require 1250 kgs of material D, that is readily available and regularly used by the organisation on its normal products.
There are 265 kgs of material D in inventory which cost 795 last week. The current market price is 3.24 per kg. Material d is normally used to make product x. Each unit of x requires 3 kgs of material d, and if material d is costed at 3 per kg, each unit of x yields a contribution of 15.
What is the relevant cost of material d to be included in the costing of the special order
The replacement cost for material d is 858.6 whereas the contribution lost from not being able to sell x is 265/3 * 15 which is higher than the replacement cost. So the contribution lost should be calculated for 1250 kgs by dividing by 3 and multiplying by 15 to be 6250 and this should be the relevant cost But the answer is not correct. Where have I went wrongThe material is readily available and is regularly used by the organisation therefore making the special order will not affect the manufacture of Product X at all and there will be no contribution lost.
They will simply buy 1250kg at $3.24 per kg., and so this is the relevant cost.
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