Question

Tara Inc. 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 $1,136 in total. If the company were to buy new supplies of this raw material on the open market, it would cost $7.25 per kilogram. However, the company has no other use for this raw material and would sell it at the discounted price of $6.50 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 $75.00 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

The relevant cost of the 160 kilograms is $965

Step-by-step explanation:

In deciding whether to proceed with the special project, the relevant cost of the is the total disposal value of the old stock less the cost of delivery to purchaser at $75.

The open market price is not relevant as the raw materials is not being used and needs not be replenished when it is exhausted.

The original cost of $1,136 to the company is not also relevant as it is a sunk cost.

Hence the relevant cost of the 160 kilograms is computed thus:

($6.50*160)-$75=$965