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Sir, could you please help with the following example:
H has inventory 15000 kg of M raw material bought 3$/kg for product line discontinued. M has no use but could be sold as scrap for $1 per kg.
One of company’s current products HN requires 4 kg of raw material available for $5/kg. M can be modified at cost of $0. 75/kg to be used as a substitute for this material. But after modification 5 kg of M is required for every unit of HN.
What is relevant cost per kg of M to be included in the cost estimate for the tender?Calculation of M used for HN gives $3, 25 /kg and this is right answer.
But why not $4 since it is higher? (selling as scrap)Where have you got $4 from? You have typed that M could be sold for scrap for $1 (not $4).
I concentrated my attention on 4 kg, and multiplied $1 by 4. Sorry. Really silly mistake…
Currently the material needed for HN is 4 kg x $5 = $20.
If they use M instead then they need 5 kg and would pay $0.75 per kg, so a cost of $3.75.
Therefore by using M they would save $20 – $3.75 = $16.25.
This is the saving for every 5 kg of M, so the saving per kg = 16.25 / 5 = $3.25 per kg.
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