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The company has just identified that is has to use an additional type of inventory that it has in stock. The inventory had cost
$8,000 to buy and would currently cost $10,000 to buy. It could be sold, as it is in the company’s home country, for $9,000, or
exported, generating income of $12,000 after delivery costs. There is no shortage of material.
What is the relevant cost of this material?
A. $12,000
B. $10,000
C. $9,000
D. $8,000Can you please explain why answer is not 12000 (opportunity cost) but answer is 10000
Because if they use it in the contract, they would then pay 10,000 to replace it (so that they could still generate the 12,000 income).
Do watch my free lectures on this. The lectures are a complete free course for Paper F5 and cover everything needed to be able to pass the exam well.
But Sir,
If the material is not used in the contract, they would be losing the 12000. isnt it the benefits foregone making it the opportunity cost.?
No. What would you do if it was you – you have the choice of buying more material for 10,000 and still getting the income of 12,000, or alternatively not buying more material and therefore losing 12,000?
Without meaning to be rude at all, I think you would be very silly not to simply pay out 10,000 and then still be able to get the income of 12,000 🙂
Again – have you watched my free lectures on relevant costing?
from what i understand is that we didnt consider the opportunity cost as a relevant becuase there is no such short in supply of this material but there would be short supply of the material then we will also consider the opportunity cost as a relevant. Correct me if i am wrong here sir
It is not relevant because it is cheaper to buy new material rather than lose the income from the existing material.
If buying more was costing more than 12,000 then they would be better to use the existing material and lose the income from it.
Very helpful advice in this particular post! It’s the little changes that make the largest changes. Thanks for sharing!
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