- November 11, 2021 at 1:20 pm #640425Natasha1996Member
- Topics: 34
- Replies: 22
A company needs 400kg of material Z to fulfill a customer order in one month’s time.
It currently has no material Z in inventory. The current purchase price of material Z is $20 per kg and this is expected to rise to $24 per kg in one month’s time. Material Z is perishable and normally 20% of stored material is lost per month.
The company expects to have 200kg of material Y in inventory in one month’s time with no alternative use other than to sell it for scrap for $18 per kg. The 200kg of material Y could be converted into 200kg of material Z in one month’s time at a cost of $4 per kg. Material Y is not perishable.
What is the total relevant cost of material Z to fulfill the customer order?
We need 400 kg of material Z in one month’s time for the contract so the current purchase cost of $20 is irrelevant because we have been given material cost of $24 in one month’s time which is relevant because we need to material in one month not today. [so it is not relevant]
We are not concerned about whether the material is perishable or not and whether how much % of stores material is lost every month. [so it is not relevant]
We are told that 200 kg of material Y is expected to be in the inventory in one month’s time:
Now we have two scenerios either we can sell the material Y in scrap for $18 or we can modify the material Y at the cost of $4 and use it for material Z.
[The cheaper scenerio would be preferred which is to modify at cost of $4]
Since it would be silly not to modify and simply purchase it from market at cost of $18 which would be costly but rather we should modify it at cost of $4 and use it for material Z because it is cheaper but we should include the scrap value as lost contribution (ie. opportunity cost) which we could have earned otherwise.
Relevant costs are therefore as follows:
New material = (200kg x $24) = 4800
Opportunity cost :
Scrap value = (200kg x $18) = 3600
Modify cost = (200kg x $4) = 800
Total relevant cost would be = $9200
Is it all correct? Thanks in advanceeNovember 11, 2021 at 4:15 pm #640438John MoffatKeymaster
- Topics: 56
- Replies: 51585
That is all correct.
However why are you attempting a question for which you do not have an answer? You should be using a Revision Kit from one of the ACCA Approved Publishers – they have answers and explanations 🙂
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