Schemm Inc. regularly uses material F04E and currently has in stock 451 liters o

Question

Schemm Inc. regularly uses material F04E and currently has in stock 451 liters of the material for which it paid $2,613 several weeks ago. If this were to be sold as is on the open market as surplus material, it would fetch $5.15 per liter. New stocks of the material can be purchased on the open market for $5.75 per liter, but it must be purchased in lots of 1,000 liters. You have been asked to determine the relevant cost of 500 liters of the material to be used in a job for a customer. The relevant cost of the 500 liters of material F04E is:

Explanation / Answer

The material F04E is a regular material, so the quantity available will not be shifted to the any specific job. But for any specific job it would be directly acquired from the market and any other surplus quantity will be transfered for the regular use.

Here the material F04E can be aquired at $5.75 per litre in lot of 1000 litres so the relevant cost will be $5.75 per litre and the excess quantity will be transfered for regular use.

Thus, Relevant Cost = $5.75*500 = $2875

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