CIMA BA2 · Chapter 11 · Question 3 of 12
A contract requires 800 kg of material M. The company has 500 kg in inventory, bought for $6.00 per kg. The current replacement price is $7.20 per kg and the inventory could be sold as scrap for $2.50 per kg. Material M is used regularly in the company's normal production. What is the relevant cost of material M for the contract?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: A) $5,760
Explanation
Because material M is used regularly, any inventory used on the contract will have to be replaced. The relevant cost of all 800 kg is therefore the replacement price: 800 x $7.20 = $5,760. The original purchase price is a sunk cost.
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