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A business purchased a tonne of material X at a total cost of £3,000. The material is no longer used in business due to not meeting specific product quality criteria. Currently, it could be sold at a scrap value of £1,000 immediately. Alternatively, it could be used as a substitute for another type of material Z that normally costs £6,000 per tonne to purchase. However, it will require £2,000 per tonne for further processing before it can be used as a substitute. The current replacement cost for material X is £5,000.

Required: What is the relevant cost of material X per tonne?

Inventory Data:
- Component X: Historic cost (£/unit) = 7, Sales value (£/unit) = 10, Replacement cost (£/unit) = 12
- Component Y: Historic cost (£/unit) = 25, Sales value (£/unit) = 18, Replacement cost (£/unit) = 22
- Component Z: Historic cost (£/unit) = 30, Sales value (£/unit) = 45, Replacement cost (£/unit) = 50

Component X is in constant use in business. We currently have 120 units of Component X.

Component Y was bought several years ago, and there are 300 units in stock which have no current use in business. It could be sold at a sales value of £18 per unit.

Component Z is in constant use in business. We currently have 20 units of Component Z.

For New Project 1, we need 100 units of Component X, 400 units of Component Y, and 100 units of Component Z.

Required: Calculate the total relevant cost to be included for components X, Y, and Z for this New Project 1 and briefly explain the rationale for your choice for each component.

Answer :

Final answer:

The total relevant cost for New Project 1, considering the quantities needed and the cost for each unit of Components X, Y, and Z, would be £10,500.

Explanation:

The relevant cost of each component for Project 1 can be determined as follows:

  • Component X: There are 120 units in stock while the project requires 100 units. Therefore, there is no need to purchase additional units, and the relevant cost would be the historic cost of £7 per unit, totaling £700.
  • Component Y: Although 300 units are in stock, they are no longer used in business and could be sold for £18 per unit. By using them on the project, the business foregoes the opportunity to earn £18 per unit. Hence, the opportunity cost (sales value) becomes the relevant cost. For the required 400 units, this totals to £7200.
  • Component Z: There are only 20 units in stock but the project requires 100 units. Hence, the business needs to purchase 80 units at a replacement cost of £50 per unit. The total relevant cost becomes (20 units X £30) + (80 units X £50) = £4600.

Summing up these costs provides the total relevant cost of £10,500 for the entire project.

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