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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. 4050 why have we not taken into account the opportunity cost of using material D in making the special product? Sir can u please explain this to me.There is no opportunity cost.
The material is in regular use, and when a material is in regular use then it needs to be purchased at whatever the current purchase price is. Even if they use material that is currently in inventory it will need replacing because it is in regular use.
Have you watched my free lectures on relevant costing? The lectures are a complete free course for Paper PM and cover everything needed to be able to pass the exam well.
Yeah, I got it now. thank you for reminding me.
and yeah I am currently watching your lectures they are very helpful. Thank you for your generous service to us, students.
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