Question

Lordie Ltd is tendering for a contract that requires two types of raw materials - Gammas and Omegas. Gammas are currently held in inventories and all will be required for the contract. These are in frequent use by the business. Omegas are also held by the company and all will be required for the contract. If they are not used for the contract they will not be used within the business for any other purpose.

Details of each type of raw material are as​ follows:

Gammas
Quantity: 1000
Historic cost: 14
Sales value: 12
Replacement cost: 13

Omegas
Quantity: 6000
Historic cost: 10
Sales value: 0
Replacement cost: 4

What is the minimum price that Lordie Ltd should include for the raw materials when tendering for the​ contract?

A. £​12,000
B. £​35,000
C.£​74,000
D. £​13,000

Answer 1

The minimum price that Lordie Ltd should include for the raw materials when tendering for the contract is £74,000. This is determined by calculating the replacement cost and sales value for each type of raw material and taking the higher amount.

Step-by-step explanation:

The minimum price that Lordie Ltd should include for the raw materials when tendering for the contract is £74,000. To determine this, we need to calculate the replacement cost for each type of raw material and then add them together. The replacement cost for Gammas is £13 per unit, so for 1000 units, the total replacement cost is £13,000. The replacement cost for Omegas is £4 per unit, so for 6000 units, the total replacement cost is £24,000. Adding these two amounts together gives us a minimum price of £37,000. However, we also need to consider the sales value of the raw materials. The sales value for Gammas is £12 per unit, so for 1000 units, the total sales value is £12,000. The sales value for Omegas is £0 per unit, so for 6000 units, the total sales value is £0. Adding these two amounts together gives us a minimum price of £12,000. Since we always take the higher of the replacement cost and the sales value, the minimum price Lordie Ltd should include for the raw materials when tendering for the contract is £74,000.