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Good day, Sir John!
1) If the material is in stock but it has no other use then the material should be sold off rather than being kept where relevant cost would be [Scrap value]
2) BUT if the material is in stock but it has no other use & no alternative then the material relevant cost would be [purchase cost + opportunity cost]
3) Opportunity cost is the lost contribution BUT it is the opportunity lost which is whether we can use the material in the contract or it could be sold off. [Is that correct?]
Can you please confirm whether these statements are correct or not?
Statement 1 is true – the relevant cost is the scrap value.
Statement 2 is not true – the relevant costs is the scrap value (which is the opportunity cost).
Statement 3 – see statement 2.
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Yes, I have watched your lectures thoroughly. 🙂
(Question)
If company ABC needs 200kgs of material X where they have 100kgs currently in inventory. Current Puchase Price is $22/kg AND it has scrap value of $15/kg*Material X is no longer used and has no alternative use in the business.
(Question end)According to what you’ve said that “if the material is in stock but it has no other use & no alternative then the material relevant cost is [scrap value] which is opportunity cost”
BUT the relevant cost is $3700 including purchase price for the 100Kgs at $22 plus opportunity cost for 100Kgs at $15
CONFUSED here!
They have 100kgs in inventory. If they did not use them on the new contract then they would scrap them and receive $15 per kg.. Therefore the cost of using them for the contract is the lost $15 per kg (the opportunity cost).
The contract needs 200 kgs, so because there are only 100 kgs in inventory they will need to buy the other 100kg which will cost them $22 per kg.
I understood your answer 🙂
BUT SIR, it has made my statement 2 correct according to the situation that “if the material is in stock [100kg] but it has no other use & no alternative then the material relevant cost would be [purchase cost + opportunity cost]”.
Purchase cost here is the 100kgs material that we needed for the contract & opportunity cost that we lost of 100kgs by selling them off as scrap.
CORRECT?
No, it is not correct at all, and you obviously did not understand my answer.
If the material is in inventory and has no other use, then the relevant cost is the lost scrap proceeds. They have 100kg in inventory, the scrap proceeds are $15 per kg, and therefore the relevant cost of using those 100 kg is 100 x $15 = $1,500.
If they only needed 100 kg for the contract then this would be the final cost.
But they need 200 kg for the contract and only have the 100 kg in inventory. Where do you think the extra 100 kg are going to come from??? These other 100 kg will have to be bought and the cost of buying them is 100 x $22 = $2,200.
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