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Sir could you please explain
Material- 500kg@$40per kg $20000Note: The total amount in stock of 500kgs was bought for $10000 some time ago for another one off contract that never happened.
Mr Smith is considering selling it for $6000 in total or using it as a substitute for another material, constantly used in normal production.
If used in this latter matter it would save $8000 of other material.
current purchase price is $40 per kg.Shouldn’t the answer be a saving of net $2000 since $6000 is an opportunity cost and $8000 a saving? But the answer is given as $8000 as an incremental cost.
If he does not take the inventory then he has the choice of selling it for 6,000 or using it as a substitute for the other material and save 8,000.
He would choose to use it as a substitute and save 8,000.
Therefore using it in the contract is losing this saving and therefore the opportunity cost is 8,000.
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