Question

Qu. 13-54 (Algo) Otool Incorporated is considering using stocks of an old raw material... Otool Incorporated is considering using stocks of an old raw material in a special project. The special project would require all 160 kilograms of the raw material that are in stock and that originally cost the company $1,536 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 $6.75 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 $79 for all 160 kilograms. What is the relevant cost of the 160 kilograms of the raw material when deciding whether to proceed with the special project

Answer 1

Otool Incorporated

The relevant cost of the 160 kilograms of the raw material when deciding whether to proceed with the special project is:

= $1,001.

Step-by-step explanation:

a) Data and Calculations:

Cost of 160 kilograms of the raw material = $1,536

Cost of new supplies of the raw material = $7 per kilogram

= $1,120 ($7 * 160)

Price at which the raw material could be sold = $6.75

Total = $1,080 ($6.75 * 160)

Delivery cost cost from sale of the raw material = $79

Net revenue to be recovered from the sale = $1,001.

The relevant cost is the lower of the replacement cost or the net realizable value. That the lower of $1,120 or $1,001.