Page 237 - BA2 Integrated Workbook STUDENT 2018

Short-term decision making

Pricing for one-off decisions

When making a one-off pricing decision only relevant cash flows should be used.

1.1 Relevant cost of materials

There are a number of alternative costs which could be relevant for materials:
purchase price, replacement cost, net realisable value or opportunity cost. The
relevant cost will depend on the given situation.

The following decision tree can help to determine the relevant cost of materials:

Are materials already No Purchase price
in inventory?

Yes

Will they be Yes Replacement cost
replaced?

No

No Net realisable value
Can they be used for
other purposes?
Yes
Opportunity cost

The opportunity cost is the contribution lost from alternative use.

Illustrations and further practice

Now try TYU 2

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