PMRelevant costing

Cost of HN unit using bought in material=4x5=20 per unit cost of using modified M=0.75x5=3.75 Overall cost saving per item HN = 20-3.75=16.25 per unit HN Produced.3000 able to be produced with existing M inventory.Saving from using M to produce HN by modification is 16.25 x 3000=48750 Alternative use of selling for scrap yields 15000x1=15000 48750-15000=33750 33750/15000=2.25 This means if my calculations are correct that 2.25 should be used as starting basis for material relevant cost for tender.

Per kg for tender=2.25 When dealing with relevant costs you need to make sure when considering the relevant cost whether it all of the following things- 1.A cash flow 2.avoidable 3.A future cost You must also determine the potential next best usage -the opportunity cost of taking a certain action.In above case processing M means it will be unavailable to sell for scrap.However,overall the organisation will be better off as long as there is adequate demand for HN.

Basically, it is to do with best of the alternative uses for the product.This can be in form of revenue raised,cost saved or a combination of both.The 4 x 5 calculation is relevant because if we did not have the product this would be cost of producing HN.

Bearing in mind what I have written in previous posts,the following choices exist- 1.Keep the material.This can be ruled out since there is no clear financial or strategic upside indicated in the question. 2.Sell the material for scrap.This yields 15000 but if sold for scrap it can't be used as a substitute material for making HN. 3.Substitute material and use to make HN.If this saves more than 15000 it should be done.