ExpertMedium2 marksShort Answer
ACCA · Question 17 · Decision-making techniques
Section B - Case 1: AquaHarvest
AquaHarvest operates a sustainable offshore kelp farm. The company is evaluating a special one-off contract to supply a cosmetics company with a specific kelp extract.
The contract requires 500 kg of 'Type A' kelp. AquaHarvest currently has 300 kg of Type A in inventory, which was bought for $4 per kg. Type A is in regular use by AquaHarvest, and the current replacement cost is $5 per kg. The remaining 200 kg will need to be purchased at the current replacement cost.
What is the total relevant cost of the 'Type A' kelp for this special contract? (Enter your answer as a whole number).
Section B - Case 1: AquaHarvest
AquaHarvest operates a sustainable offshore kelp farm. The company is evaluating a special one-off contract to supply a cosmetics company with a specific kelp extract.
The contract requires 500 kg of 'Type A' kelp. AquaHarvest currently has 300 kg of Type A in inventory, which was bought for $4 per kg. Type A is in regular use by AquaHarvest, and the current replacement cost is $5 per kg. The remaining 200 kg will need to be purchased at the current replacement cost.
What is the total relevant cost of the 'Type A' kelp for this special contract? (Enter your answer as a whole number).
How to approach this question
Determine the relevant cost for materials in regular use. If a material is in regular use, any units taken from inventory must be replaced. Therefore, the relevant cost is the replacement cost for all units required.
Full Answer
Because 'Type A' kelp is in regular use, any inventory used for this special contract will need to be replaced to meet normal production needs. Therefore, the relevant cost for all 500 kg is the current replacement cost of $5 per kg.
Total relevant cost = 500 kg * $5/kg = $2,500. The historical cost of $4 is a sunk cost and irrelevant.
Common mistakes
Calculating (300 kg * $4) + (200 kg * $5) = $2,200. This ignores the fact that the 300 kg must be replaced at $5.
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