ACCA Applied Skills · Performance Management · Make-or-buy and other short-term decisions
A firm needs 500 kg of material X for a special order. It holds 300 kg in inventory, bought at $8 per kg. The material is regularly used in production, and its current replacement cost is $10 per kg. The remaining 200 kg must be bought at the current price. What is the relevant cost of material X for the order?
The relevant cost is $5,000. Because the material is regularly used, inventory consumed must be replaced at the current price of $10 per kg. All 500 kg is therefore valued at replacement cost, giving $5,000. The historic cost of $8 is a sunk cost and irrelevant.
- A$4,000
- B$5,000Correct
- C$4,400
- D$5,400
Explanation
Material is regularly used, so inventory used must be replaced at $10 per kg. All 500 kg therefore has a relevant cost of 500 x $10 = $5,000. Using the historic $8 for the inventory gives $4,400, which ignores replacement.
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