Question

Janus Corporation has in stock 43,700 kilograms of material L that it bought five years ago for $6.10 per kilogram. This raw material was purchased to use in a product line that has been discontinued. Material L can be sold as is for scrap for $3.23 per kilogram. An alternative would be to use material L in one of the company's current products, E99D, which currently requires 2 kilograms of a raw material that is available for $9.45 per kilogram. Material L can be modified at a cost of $0.62 per kilogram so that it can be used as a substitute for this material in the production of product E99D. However, after modification, 3 kilograms of material L is required for every unit of product E99D that is produced. Janus Corporation has now received a request from a company that could use material L in its production process. Assuming that Janus Corporation could use all of its stock of material L to make product E99D or the company could sell all of its stock of the material at the current scrap price of $3.23 per kilogram, what is the minimum acceptable selling price of material L to the company that could use material L in its own production process?

Answer 1

The company should sale each kilograms for $5.68

Step-by-step explanation:

We have to solve for the cost saving the kilograms of L could bring if replace the other material:

additional cost x kilograms needed

0.62 x 3 = 1.86 per finished goods unit

with acost of 1.86 dollar the company can replace a raw material which cost:

9.45 x 2 = 18.9 per finsihed goods unit

The differencial gain will be for: 17.04 for every three kilograms

we divide this gains to get the marginal cost saving per kilograms:

17.04 / 3 = 5.68

The company should sale the kilogram of L at $5.68 as this is the benefit they can provide to the company if used