Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA PM Exams › Relevant cost analysis (exercise from the revision kit)
- This topic has 1 reply, 2 voices, and was last updated 4 years ago by John Moffat.
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- October 26, 2019 at 7:02 pm #550902
Hello Sir,
I hope you are doing well.
I watched your lectures and I did the questions, now I am doing the exercises from the kit book and I got one exercise that I do not understand. If you could kindly help me please?H has in inventory 15,000 kg of material M, a raw material which it bought for 3$/kg five years ago, for a product line which was discontinued four years ago. M has no use in its existing state but could be sold as scrap for $1 per kg. One of the company`s current product (NH) requires 4 Kg of a raw material, available for$ 5 per kg. M can be modified at a cost of £0.75 per kg so that it may be used as a substitute for this material. However, after modification, 5 kg of M is required for every unit NH to be produced.
H has now received an invitation to tender for a product which could use M in its present state.
What is the relevant cost per kg of M to be included in the cost estimate for the tender?
A- $0.75
B- $1.00
C- $ 3.00
D- $ 3.25SOLUTION: D (Why we have to do all this process? why can’t be the scarce price, if it’s the higher?)
Replacement material cost saved (4kg @ $5.00) $20.00
less further processing cost ($0.75 x 5 kg) $ 3.75Value of M in current use, for each unit made = $16.25
Therefore opportunity cost of using M n the job being tendered for is $16.25 / 5 kg = $3.25 per kg.
Thank you
NereaOctober 27, 2019 at 8:34 am #550945I assume by ‘scarce price’ you are referring to the fact that they could buy the material needed to $5 per kg..
They certainly could do this, but the company will always want to achieve the lowest cost. It is cheaper to use material M and modify it (at an overall cost of $3.25 per kg) rather than buy the actual material needed and pay $5 per kg.
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