CMA Final · Strategic Cost Management · Relevant Cost Analysis
Kaveri Textiles holds 400 metres of a special fabric bought earlier for Rs 150 per metre for an order that was cancelled. The fabric has no other use, but it can be sold as scrap for Rs 40 per metre. A new order needs 300 metres of this fabric. What is the relevant cost of the fabric for the new order?
The relevant cost is Rs 12,000. The fabric was bought earlier, so its original price is sunk. Using it forgoes scrap sales of Rs 40 per metre, so the opportunity cost for 300 metres is 300 x 40 = Rs 12,000.
- ARs 12,000Correct
- BRs 45,000
- CRs 33,000
- DRs 60,000
Explanation
The purchase price is a sunk cost. The only opportunity cost of using the fabric is the scrap value forgone, so 300 x Rs 40 = Rs 12,000. Rs 45,000 wrongly uses the historical cost of the 300 metres.
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