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Please bear with me as the question is quite long but the question is simple. It’s all about shrinkage.
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Q84
Appler is considering the relevant cash flows involved in a short-term decision. An important client has asked for the minimum price for the processing of a compound. The compound involves the following:MAT A: Appler needs 500 kg of material for the compound but has 200 kg in stock present. The stock items were bought 3 months ago for $5/kg but have suffered 10% shrinkage since that date. Material A is not regularly used in the business and would have to be disposed of at a cost to Appler of $400 in total. The current purchase price of material A is $6.25/kg.
MAT B: Appler needs 800 kg of material B and has this in stock as it is regularly needed. The stock was bought 2 months ago for $4/kg although it can be bought now at $3.75/kg due to its seasonal nature.
Processing energy costs would be $200 and the supervisor says he would allocate $150 of his weekly salary to the job in the company’s job costing system.
Based upon the scenario information, what is the total cost of MAT A and B to be built in to the minimum price calculation?
$[ _________ ]
———————————————–According to Kaplan, MAT A to be bought is 300 kg and so it arrives at $4,475 in total.
In my opinion, due to 10% shrinkage, MAT A to be bought is 320 kg, hence the total is $4,600. What am I doing wrong here Sir? I am struggling with relevant costing.That will be all for today. Thank you very much in advance. God bless you.
Kaplan are correct.
The shrinkage only applies to the 200kg that are already in stock (when they were bought they will have actually bought more, although that is there just to confuse and it not relevant to the answer).
The extra 300kg that is not in stock at present will need to be bought at the current price, and there is not reason that this should shrink at all. (Presumably the 200kg in stock had shrunk because it had been there a long time).Oh, I see! So, 200 kg is the amount AFTER the shrinkage. I thought it was the figure before shrinking. My misreading…
Thank you so much for answering all my questions. You are the best!
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