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Good Afternoon
Quick question:
“The wood is regularly used by Hi Life Co and usually costs $8.20 per m2. However, the company’s current supplier’s earliest delivery time for the wood is in three weeks’ time. An alternative supplier could deliver immediately but they would charge $8.50 per m2. Hi Life Co already has 500 m2 in inventory but 480 m2 of this is needed to complete other existing orders in the next two weeks. The remaining 20 m2 is not going to be needed until four weeks’ time.”
Why the solution suggests that the quote should have “Wood = (30m2 x $8.50) + (20m2 x $8.20) = $419”
I get the first calculation for the 30m2 to be bought, but why it counts the 20m2 that we already have in stock and multiplies it with the historic (sunk) cost? ($8.20)
Thank you
Hi Life Co needs to consider the cost of purchasing additional wood from the alternative supplier for the immediate delivery of 30 m2, as well as the cost of using the remaining 20 m2 from their inventory.
The alternative supplier charges $8.50 per m2 for immediate delivery, so the cost for the 30 m2 would be (30m2 x $8.50) = $255.
The remaining 20 m2 from their inventory would be valued at the regular cost of $8.20 per m2, so the cost for the 20 m2 would be (20m2 x $8.20) = $164.
Adding these costs together, the total cost of wood for the quote would be $255 + $164 = $419.
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