Your company regularly uses material X and currently has in inventory 500 kgs for which it paid $1 500 two weeks ago. If

[answerhappygod]

Your company regularly uses material X and currently has in inventory 500 kgs for which it paid $1 500 two weeks ago. If this were to be sold as raw material, it could be sold today for $2.00 per kg. You are aware that the material can be bought on the open market for $3.25 per kg, but it must be purchased in quantities of 1,000 kgs. You have been asked to determine the relevant cost of 600 kgs of material X to be used in a job for a customer. The relevant cost of the 600 kgs is:

a) $1 325

b) $1 825

c) $1 950

d) $3 250

A company is considering its option with regard to a machine which cost $60 000 four years ago. If sold, the machine would generate scrap proceeds of $75 000. If kept, this machine would generate net income of $90 000. The current replacement cost for this machine is $105 000. What is the relevant cost of the machine?

a) $105 000

b) $90 000

c) $75 000

d) $60 000

E Co has been asked to quote a price for a one-off contract. The company’s management accountant has asked for your advice on the relevant costs for the contract. The following information is available:

Materials The contract requires 3,000 kg of material K, which is a material used regularly by the company in other production. The company has 2,000 kg of material K currently in stock that had been purchased last month for a total cost of $19,600. Since then the price per kilogram for material K has increased by 5%. The contract also requires 200 kg of material L. There is 250 kg of material L in stock, which are not required for normal production. This material originally cost a total of $3,125. If not used on this contract, the stock of material L would be sold for $11 per kg. Labour The contract requires 800 hours of skilled labour. Skilled labour is paid $9·50 per hour. There is a shortage of skilled labour and all the available skilled labour is fully employed in the company in the manufacture of product P. The following information relates to product P: .............. $ per unit $ per unit Selling price 100 Less Skilled labour 38 Other variable costs 22 (60) 40 Required:


a) Prepare calculations showing the total relevant costs for making a decision about the contract in respect of the following cost elements:

(i) Materials K and L; and (ii) Skilled labour.

b) Explain how you would decide which overhead costs would be relevant in the financial appraisal of the contract.