CAF-5 · Chapter 17 · Question 10 of 20
(Relevant Costing & Non-Continuous Materials) A special contract requires 500 kg of Material Z. The company currently holds 300 kg of Material Z in inventory, purchased years ago at Rs. 12/kg. Material Z is no longer in regular use and has no alternative use other than being sold as scrap for Rs. 10/kg. The current market replacement cost of Material Z is Rs. 15/kg. What is the total relevant material cost for the 500 kg needed for this contract?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) Rs. 6,000
Explanation
Total needed is 500 kg. For the 300 kg in inventory (no alternative use), the relevant cost is the opportunity cost of lost scrap value: 300 kg * Rs. 10 = Rs. 3,000. For the remaining 200 kg, the company must buy it at replacement cost: 200 kg * Rs. 15 = Rs. 3,000. Total relevant cost = 3,000 + 3,000 = Rs. 6,000.
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