ACCA FM · Chapter 6 · Question 10 of 10
A project needs 2,000 kg of a material. The company holds 2,000 kg in inventory, bought some time ago for $8 per kg. The current replacement cost is $10 per kg and it could be sold for $5 per kg. The material is in regular use in the business. What is the relevant cost of the material for the project?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: D) $20,000
Explanation
Because the material is regularly used, any material used on the project must be replaced, so the relevant cost is its current replacement cost: 2,000 kg x $10 = $20,000. The original cost of $8 per kg is a sunk cost. The resale value would only be relevant if the material had no other use in the business.
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