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Hello and thank you for this great service.
Please help me understand this query regarding “M” which is in stock;
One of the company’s current product (HN) requires 4kg of raw materials @ $5 per kg. M can be modified at cost of .75 per kg so it can be substituted for this material. However after modification 5kg of M is required for every unit.
My question is why is the “replacement cost SAVED (5*4) RELEVANT here if will use M to process? And why do we need to subtract it from the processing cost (.75*5).
Hi,
Thanks for your message.
It looks like the original material can be used elsewhere and so by using material M instead of the original material- the cost of replacing the original material would be saved.
I presume Material M is in stock already and has no other use and so only the cost of the modification will be relevant along with the savings above.
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