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Push Co would also need a computerized control system called “Swipe 2”. The current market price of Swipe 2 is $10800, although T Co has an older version of the system, ‘Swipe 1’ in inventory, which could be modified at a cost of $4600. T Co paid $5400 for Swipe 1 when it ordered it in error two months ago and has no other use for it. The current market price of Swipe 1 is $5450, although if T Co tried to sell the one they have, it would be deemed to be ‘used’ therefore only worth $3000.
instead of incurring additional cost of (10800-4600)=$6200 which is also known as saving, why $6200 is not a relevant cost? instead of buying Swipe 2, company can save $6200 right? why is this not a relevant cost?
however, the answer only mention
i) $4600 (modification cost)
ii) market value of Swipe 1 $3000total $7600 and compared with outsourcing cost of $10800
and choose the cheaper optionmy concern is
i) why $6200 is not a relevant cost?
ii) why need to add both $4600 and $3000? is it for comparing purpose between relevant cost and outsourcing costi do. watch your lecture Sir John, but i dont get this part 🙁
If they did not do the job for Push they would not need a control system and so would sell the existing Swipe 1 and receive 3,000.
If they do do the job for Push then they have two choices:
1. Use the existing Swipe 1 and modify it. This would mean losing the 3,000 they would otherwise have received and also paying 4,600 to modify. So a total of 7,600.
or
2. Buy a Swipe 2. This will cost them 10,800. (They will not lose 3,000 because they would then sell Swipe 1).
So the cheapest option is to modify the existing Swipe 1 and the relevant cost is 7,600.
(I don’t know why you refer to outsourcing – there is no outsourcing involved here)
A special job for a customer require 8 tonnes of a material M. The company no longer uses this material regularly although it holds 3 tonnes in inventory. These originally costs $44 per tonne, and could be resold to a supplier for $35 per tonne. Alternatively these materials could be used to complete another job instead of using other materials that would cost $126 to purchase. The current price of Material M is $50 per tonne.
In comparing in the first question and second question (current post)
I would like to confirm my understanding.
for the first question, company has either choice of buying “Swipe 2” and modify “Swipe 1”, and (Swipe 1 is not currently using in the production process. in this statement, we would like to find the cheapest (cost)
for the second question, company is currently using material M, and we would like to compute what the company would do with the material if they did not do the special job, finding the better total (savings).
For relevant cost, we would like find the
1) cheaper cost
2) higher savings.I would like double confirm my understanding, and thank you Sir John
Yes – your understanding is correct 🙂
Given that they require 8 tonnes and only have 3 tonnes in inventory, then whatever happens they need to buy the other 5 tonnes at $50 per tonne.
For the 3 tonnes in inventory that can either sell them and receive $105 or use them in another job and save $126. It would be better to save $126.
Thank you Sir John. I finally understood relevant costing based on your assistance in Ask My Tutor Forum
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