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1.UU Company has been asked to quote for a special contract. The following information
about the material needed has been given:
Material X:
Book value $5.00 per kg Scrap value$0.50 per kg Replacement cost $5.50 per kg
The contract requires 10 kgs of Material X. There are 250 kgs of this material in inventory
which was purchased in error over two years ago. If Material X is modified, at a cost of
$2 per kg, it could then be used as a substitute for material Y which is in regular use and
currently costs $6 per kg.2.Push Co would also need a computerised control system called ‘Swipe 2. The current market price of Swipe2 is $10,800, although T Co has an older version of the system, ‘Swipe 1’, in inventory, which could be modified at a cost of $4,600. T Co paid $5,400 for Swipe 1 when it ordered it in error two months ago and has no other use for it. The current market price of Swipe 1 is $5,450, although if T Co tried to sell the one it has, it would be deemed to be ‘used’ and therefore only worth $3,000.
What is the difference in this two questions. In both question we have an alternate.
In the first question, the money saved from not buying Y is taken.
In the 2nd question, modification cost + selling cost(3000) is taken.I don’t find any difference in this two questions. But the answers are through different approach.
Please clarify my doubtThe questions are a lot different. They would only be similar if in the first question it was material Y that was needed for the contract, which is not the case.
In the first one they need material X for the contract. If they were not using it in the contract they could either sell if for 0.50 per kg, or use it as a substitute for Y which would save them 6 – 2 = $4.
They would be better using it as a substitute for Y to save $4.
Therefore using X in the contract is losing them the $4 that they could have otherwise saved.In the second one, they can either buy a Swipe 2 for the contract or instead use Swipe1 and modify it. It is cheaper to use Swipe 1 (and modify it) and so this is what they will do.
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