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HI, i can’t understand a point related to relevant costing question …..the contract requires 10kgs of material X which should be the point of focus and we have product x already in stock and they did not tell us whether it is in regular use or not ……….Now we have two option either we sell it at as a scrap or use it as an alternative to material Y with modification cost of 2 ..
we would definitely select latter one as it would save us 4$ (6-2) material Y cost is 6NOW my point is ….the relevant cost should be 10× 2=20 $ but the book says 40$ which is saving 6-2=4× 10=40….we are here t find relevant cost of material x not saving??? plz elaborate
RELATED QUESTION ”
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 Scrap value Replacement cost
$5.00 per kg $0.50 per kg $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.
What is the relevant cost of the materials for the special contract?For your first question, if we did not use X in the contract we would use it as an alternative to Y and would save $4. By using X in the contract we will not make the saving of $4 and therefore the relevant cost of doing the contract is the lost saving (the opportunity cost) of $4.
when you explain, it seems so simple and i waste hours on it ….got your point sir thank you.
one tiny bit of another question
when we already had the stock and we are not regularly using it, means we will always look up to the opportunity cost and not the replacement cost ?
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