ICAEW BIP · Chapter 12 · Question 2 of 7
A contract needs 800 kg of material V. The company holds 500 kg, which originally cost £6.00 per kg. Material V is no longer used in the company's production and, if not used on the contract, would be sold for £4.00 per kg. The current purchase price is £7.50 per kg. What is the relevant cost of material V for the contract?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) £4,250
Explanation
The 500 kg held have no other use, so the relevant cost of using them is the sale proceeds given up: 500 x £4.00 = £2,000. The remaining 300 kg must be bought at £7.50, costing £2,250. Total relevant cost = £4,250. The original cost is sunk.
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