Asked by Maria Rodarte on Jun 15, 2024
Verified
Otool Incorporated is considering using stocks of an old raw material in a special project. The special project would require all 190 kilograms of the raw material that are in stock and that originally cost the company $2,456 in total. If the company were to buy new supplies of this raw material on the open market, it would cost $7 per kilogram. However, the company has no other use for this raw material and would sell it at the discounted price of $6.10 per kilogram if it were not used in the special project. The sale of the raw material would involve delivery to the purchaser at a total cost of $63 for all 190 kilograms. What is the relevant cost of the 190 kilograms of the raw material when deciding whether to proceed with the special project?
A) $1,159
B) $1,096
C) $1,273
D) $1,292
Special Project
A designated set of tasks or activities aimed at achieving a specific goal or outcome, often outside of routine operations.
Relevant Cost
refers to the costs that will be affected by a decision in the future and, thus, should be considered in decision-making processes.
Discounted Price
A reduced price offered on goods or services, usually for a limited time or under certain conditions.
- Understand the concept of relevant costs for decision-making and identify relevant versus irrelevant costs.
- Calculate the minimum acceptable price for selling or purchasing products based on relevant costs.
Verified Answer
SS
Sreekari SamudralaJun 15, 2024
Final Answer :
B
Explanation :
The relevant cost is the opportunity cost of not selling the raw material, which is the net sale proceeds after delivery costs. Selling price per kilogram is $6.10, so for 190 kilograms, it would be $6.10 * 190 = $1,159. Subtracting the delivery cost of $63 gives $1,159 - $63 = $1,096.
Learning Objectives
- Understand the concept of relevant costs for decision-making and identify relevant versus irrelevant costs.
- Calculate the minimum acceptable price for selling or purchasing products based on relevant costs.