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In order to utilise some spare capacity, K is preparing a quotation for a special order which
requires 2,000 kgs of material J.
K has 800 kgs of material J in inventory (original cost $7.00 per kg). Material J is used in the
company’s main product L. Each unit of L uses 5 kgs of material J and, based on an input
value of $7.00 per kg of J, each unit of L yields a contribution of $10.00.
The resale value of material J is $5.50 per kg. The present replacement price of material J is
$8.00 per kg. Material J is readily available in the market.
What is the relevant cost of the 2,000 kgs of material J to be included in the quotation?
Can you explain why haven’t they considered resale value in ans?
Because they will not be selling it. J is used in their main product and so if any is taken from inventory it will need replacing at the current purchase price.
I do explain this in my free lectures. The lectures are a complete free course for Paper PM and cover everything needed to be able to pass the exam well.