CAF-5 · Chapter 14 · Question 8 of 10
A company holds raw materials in inventory that are no longer in regular use. The material can be sold for a scrap value of Rs. 1.50 per kg. Alternatively, it can be modified and used as a substitute for another material on a different project, saving the company Rs. 2.00 per kg. If the material is used on a new special contract, what is its relevant cost?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) Rs. 2.00 per kg
Explanation
When a material is no longer in regular use, its relevant cost is the highest alternative value the company could obtain from it. It can either be sold for Rs. 1.50 or used to save Rs. 2.00. Since Rs. 2.00 is the higher benefit being sacrificed by using it on the new contract, Rs. 2.00 is the relevant cost.
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