question archive Gamma Magic Ltd has been asked to quote a price for another major contract
Gamma Magic Ltd has been asked to quote a price for another major contract
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Gamma Magic Ltd has been asked to quote a price for another major contract. As the cost accountant of the company, you have been asked to work on the relevant costs of the new contract. The following information was provided: Material Stone: The company requires 3000 kg of material Stone, which is a material regularly used by the company in other contracts. The company currently has 2000 kg of Stone in stock that has been purchased last month for a total cost of $ 19,600. Since then, the price per kg for material Stone has increased by 5%. Material Quartz: The contract also requires 200 kg of material Quartz. There are 250 kg of material Quartz in stock, which are not required in any other contracts so far. This material originally cost a total of $ 3,125. If not used on this new contract, the material Quartz would be sold for $ 11 per kg. REQUIRED: (a) In order to quote for the new contract, calculate the relevant cost in respect of the following cost elements: (0) Material Stone (3 marks) (ii) Material Quartz (3 marks)
(b) Explain what you understand by opportunity cost and comment on its relevance in decision making. (4 marks)
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1. Relevant Cost for Material Stone:
Purchase price for cost of raw material- $19,600/2000 kg = $9.8 per kg
Now, price 5% increased = $9.8*105% = $10.29 per kg
Therefore, relevant Cost for Material Stone: $10.29per kg*3000 kg = $30,870
2. Relevant Cost for Material Quartz= Opportunity cost of not selling the material if it is remaine unused
Therefore, relevant Cost for Material Quartz: $11per kg*200 kg = $2,200
Less :- revenue from selling the extra 50 kg @11 = $550
Hence, total relevant cost = $1.650
3. The opportunity cost is the value of the best alternative given up.
