Alpha Inc. regularly uses material FLAV4 and currently has in stock 460 liters of the material for which it paid $2,622 several weeks ago. If this were to be sold as is on the open market as surplus material, it would fetch $5.25 per liter. New stocks of the material can be purchased on the open market for $5.85 per liter, but it must be purchased in lots of 1,000 liters. You have been asked to determine the relevant cost of 800 liters of the material to be used in a job for a customer. The relevant cost of the 800 liters of material FLAV4 is: (CIMA adapted)
A) $5,850.
B) $4,200.
C) $4,404.
D) $4,680.

Question

Quizplus · Accepted Answer

The relevant cost is the opportunity cost of using the material, which is the higher of the resale value or the replacement cost. The resale value is $5.25 per liter, so for 800 liters, it is 800 * $5.25 = $4,200. The replacement cost is $5.85 per liter, so for 800 liters, it is 800 * $5.85 = $4,680. Since $4,680 is higher, it is the relevant cost.

Alpha Inc Regularly Uses Material FLAV4 and Currently Has in Stock