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kaplan question 122 RELEVANT COSTS

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  • This topic has 3 replies, 2 voices, and was last updated 1 year ago by John Moffat.
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  • April 10, 2021 at 4:38 am #616607
    ABDULLAHI312
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    Appler is considering the relevant cash flows involved in short term decision. An important client has asked for the minimum price for the processing of the compound. the compound involve the following
    MATERIAL A: Appler needs 500kgs of the material but has 200kg in stock present. the stock items were bought 3months ago for $5/kg but have suffered 10% shrinkage since that date. Material A is not regularly used in business and would have to be disposed of at a cost to Appler of $400 in total. the current purchase price of Material A is $6.25/kg.
    MATERIAL B: Appler bought 800kgs of material B and has this in stock as it is regularly needed. the stock was bought 2months ago for $4/kg although it can be bought now at $3.75/kg due to its seasonal nature.
    What is the total cost of material A & B to be built in to the minimum price calculation ?
    ANS; 4475.
    Kindly, elaborate on how the shrinkage will be treated. thanks.

    April 10, 2021 at 7:37 am #616619
    John Moffat
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    The shrinkage is irrelevant because they have 200kg left in inventory and so any shrinking will already have happened.

    Given that they need 500 kgs, they will use the 200 kg in inventory and will save the $400 that they would otherwise have to pay to dispose of it. They will have to buy the other 300 kg and these will cost $6.25 per kg.
    Therefore the total relevant cost of material A is 1875 – 400 = $1,475

    April 10, 2021 at 8:50 am #616631
    ABDULLAHI312
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    Great. thanks so much. suppose(as opposed to above question) we bought 200kg 3months ago and have suffered 20kg shrinkage over the period, will we going to consider the shrinkage? as in we will buy 320kgs.

    April 10, 2021 at 3:09 pm #616677
    John Moffat
    Keymaster
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    Then you would have to buy 320kgs, but not here because it specifically says that there are 200kg in inventory and therefore that is after the shrinking.

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