ACCA Applied Skills · Performance Management · Relevant cost analysis
Zeta Co is considering a special order that needs 400 kg of Material X. Zeta holds 500 kg of X in inventory, bought for $6 per kg. X is regularly used in production, and its current replacement cost is $7.50 per kg. Its current scrap value is $2 per kg. What is the relevant cost of Material X for the order?
The relevant cost is $3,000. Because Material X is regularly used, any units consumed by the order must be replaced, so replacement cost of $7.50 per kg applies to 400 kg. The historic cost of $6 is sunk and the scrap value is irrelevant.
- A$800
- B$2,400
- C$3,000Correct
- D$600
Explanation
X is in regular use, so using it means it must be replaced. Relevant cost is the replacement cost: 400 kg x $7.50 = $3,000. The $2,400 option uses the historic cost of $6 per kg, which is a sunk cost and is not relevant.
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