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Hi, I have little confusion question 71- Kaplan book
Material X:
Original cost- $5 per kg, Scrap value: $0.50 per kg, Replacement cost $5.50 per kg
The contract requires 10kg of materials X .There are 250kg of this material in inventory which was purchased in error over two years ago. If material X is modified, at cost of $2 per kg, it could be used as a substitute for material Y which is in regular use and currently cost $6 per kg.
What is the relevant cost for the special contract?
Answer is $40 but why $40?
If the did not use it in the contract then they would have two choices. The could either sell it for $0.50 per kg, or they could use it instead of material Y. Using it instead of material Y would save them $4 per kg (because they would spend only $2 instead of buying Y for $6).
So it would be better to use it instead of material Y. So by using it in the contract they would be losing the $4 saving that they could have made and therefore this is the relevant cost per kg..
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