Question

Explain the key points to communicate to the CFO. Use the data sets linked in the Supporting Materials section to answer questions a, b, and c. Include the following details in your response:

A. If the company had purchased all its materials from the online marketplace, describe what inventory cost would be shown for all materials on hand based on the average transaction price.
B. Explain if the inventory cost value is higher or lower than the value of all materials if using their standard price.
C. If the company can freely choose the lower of the standard price or the average price in the online marketplace, explain what the lowest possible inventory cost of all materials on hand is.
D. Identify whether there is a particular marketplace vendor who always sells at a price lower than the standard price cost of all materials on hand.

Answer 1

To summarize, the CFO should be informed about inventory costs being lower if materials are purchased at the average marketplace price compared to the standard price, unless the standard price is lower. The lowest inventory cost can be achieved by using the lower of standard or marketplace prices.

Step-by-step explanation:

To communicate key points to the CFO regarding inventory cost based on the average transaction price, it is essential to consider the cost structure outlined in Table 8.8. Using this data, we calculate the total cost, average variable cost, average total cost, and marginal cost, as well as average profit, and identify the relationship between production and costs. Furthermore, production factors have corresponding prices that should be taken into account.

If the company had purchased all its materials from the online marketplace, assuming the average transaction price is less than the standard price, the inventory cost on the balance sheet would be lower than using the standard price. This leads to potential cost savings. However, if the standard price is lower, that value would be used to calculate inventory, ensuring the lowest possible inventory cost under the lower of cost or market accounting principle.

Additionally, if there's a vendor offering prices consistently below the standard cost, this could be a strategic sourcing opportunity for the company. It's important to analyze short-run costs in terms of total cost, fixed cost, variable cost, marginal cost, and average cost to determine the most profitable course of action.