CIMA BA2 · Chapter 11 · Question 4 of 12
A contract requires 800 kg of material N. The company has 500 kg of N in inventory, originally bought for $6.00 per kg, which it has no other use for and could sell for $2.50 per kg. The remaining 300 kg would have to be bought at the current price of $7.20 per kg. What is the relevant cost of material N for the contract?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) $3,410
Explanation
The 500 kg in inventory has no alternative use, so the only benefit given up by using it is its resale value: 500 x $2.50 = $1,250. The extra 300 kg must be purchased: 300 x $7.20 = $2,160. Relevant cost = $1,250 + $2,160 = $3,410.
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