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An organization is considering the costs to be incurred in respect of a special order
opportunity. The order would require 1,250 kgs of material D, which is readily available and
regularly used by the organization on its normal products.
There are 265 kgs of material D in inventory which cost $795 last week. The current market
price is $3.24 per kg. Material D is normally used to make product X. Each unit of X requires
3 kgs of material D, and if material D is costed at $3 per kg, each unit of X yields a
contribution of $15.
What is the relevant cost of material D to be included in the costing of the special order?
A $3,990
B $4,050
C $10,000
D $10,300The answer to this ques is B.
I am not able to understand how the answer is B (i.e. 265*3.2 = 4050) why have we not taken into account the opportunity cost of using material D in making the special product? can anyone please explain this to me.I think it is down to the fact that D is readily available and regularly used by organisation. It’s availability is unrestricted and there seems to be no other constraint on producing both the special order and product X. If there were some restriction or restrictions then you would have to consider opportunity cost of effective contribution lost from not being able to produce some amount of X. Hope this helps.
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