Question

Lafferty Corporation is a specialty component manufacturer with idle capacity. Management would like to use its unused capacity to generate additional profits. A potential customer has offered to buy 6,250 units of component Rocket. Each unit of Rocket requires 8 units of material CES4 and 6 units of material XES7. Data concerning these two materials follow:

Material	Units in Stock				Original Cost Per Unit				Current Market Price Per Unit				Disposal Value Per Unit
CES4		37,420			$	3.90			$	3.60			$	3.20
XES7		31,560			$	9.40			$	9.85			$	8.60

Material CES4 is in use in many of the company's products and is routinely replenished. Material XES7 is no longer used by the company in any of its normal products and existing stocks would not be replenished once they are used up.

What would be the relevant cost of the materials, in total, for purposes of determining a minimum acceptable price for the order for product Rocket? (CIMA adapted)

Multiple Choice

• $509,925

• $554,021

• $501,820

• $548,750

Answer 1

Units of Rocket required to be manufactured	6,250	Current Stock	To be purchased	Market price	Disposal price
8 Units of CES4 required to manufacture above	50,000	37,420	12,580	$3.60	$3.20
6 Units of XES7 required to manufacture above	37,500	31,560	5,940	$9.85	$8.60
Relevant Cost
Since CES4 is in regular use, Market price is relevant	$180,000
Hence total input required is taken at market price
For XES7 existing units will be considered @ disposal price as it is no longer in use & additional units required will be considered @ market price	$271,416
Additional units of 5,940@ market price	$58,509
Total Relevant Cost	$509,925

Answer 2

Total relevant cost is $509,925