ICAEW BIP · Chapter 12 · Question 1 of 7
A contract needs 800 kg of material T. The company holds 500 kg, which originally cost £6.00 per kg. Material T is used regularly in the company's production. Its current replacement cost is £7.50 per kg and its resale value is £4.00 per kg. What is the relevant cost of material T for the contract?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: D) £6,000
Explanation
Because material T is used regularly, any inventory used on the contract will have to be replaced. All 800 kg are therefore valued at replacement cost: 800 x £7.50 = £6,000. The original cost of £6.00 is a sunk cost and is not relevant.
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