CMA Final · Strategic Cost Management · Relevant Cost Analysis
Mehta Fabricators holds 400 kg of a special alloy bought two years ago at Rs 300 per kg. The alloy has no other use in the firm. It can be sold as scrap at Rs 120 per kg, with selling costs of Rs 10 per kg. A new order can use all 400 kg. What is the relevant cost of the alloy for this order?
The relevant cost is Rs 44,000. The alloy has no alternative use, so its opportunity cost is the net scrap value of Rs 110 per kg (Rs 120 less Rs 10 selling cost) for 400 kg. The original purchase price is sunk and is ignored.
- ARs 1,20,000
- BRs 44,000Correct
- CRs 48,000
- DRs 76,000
Explanation
The historical cost of Rs 300 is sunk. The relevant cost is the opportunity cost, which is the net scrap realisation: (120 - 10) x 400 = Rs 44,000. Rs 48,000 ignores the selling cost, while Rs 1,20,000 uses the sunk purchase cost.
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