CMA Final · Strategic Cost Management · Relevant Cost Analysis
Ananya Textiles holds 800 metres of a special fabric bought earlier for Rs 150 per metre for an order that has been cancelled. The fabric has no other use, but a scrap dealer will buy it at Rs 40 per metre. A new order can use all 800 metres. For this new order, what is the relevant cost of the fabric?
The relevant cost is Rs 32,000. The original purchase price is sunk and ignored, and the only alternative use of the fabric is sale as scrap at Rs 40 per metre, so the opportunity cost is 800 metres multiplied by Rs 40.
- ARs 32,000Correct
- BRs 1,20,000
- CRs 88,000
- DRs 0
Explanation
The purchase price is a sunk cost. Since the fabric has no alternative use other than scrap sale, its opportunity cost is the scrap value: 800 x 40 = Rs 32,000. Rs 1,20,000 wrongly uses the historical cost, and Rs 88,000 wrongly deducts scrap value from it.
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