Question

Help is appreciated.

Otool Inc. is considering using stocks of an old raw material in a special project. The special project would require all 180 kilograms of the raw material that are in stock and that originally cost the company $2.406 in total. If the company were to buy new supplies of this raw material on the open market, it would cost $7.05 per kilogram. However, the company has no other use for this raw material and would sell it at the discounted price of $6.35 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 $68 for all 180 kilograms. What is the relevant cost of the 180 kilograms of the raw material when deciding whether to proceed with the special project? Multiple Choice $1,543 5.07 $1,075 О. $1252 $1,269

Answer 1

The relevant costing is used in case of managerial decision making for the new proposal, it can be for material ,labor , overheads etc. The relevant costs are the incremental and the opportunity costs it does not includes the cost already incurred as they become sunk cost for the decision making.

Here relevant cost of materials is to be discussed, based on the whether material is available or not the relevant cost rules are different.

1. In case material is not in stock, then relevant cost is the purchase cost plus opportunity cost if any.

2. In case material is in stock: here we have two scenarios i.e whether it has some other /regular use then relevant cost is the replacement cost plus opportunity cost if any.

Further if the material is available but no alternative use is there, then relevant cost is the opportunity cost i.e sale or disposable value.

In the given case, Otool Inc is considering a special project and the old material is available which has no alternative use, then in this case the relevant cost is the net disposable value.

Here the material can be sold @ 6.35 per kilogram, and an additional cost of $ 68 for sell of 180 kg

Thus relevant cost = (180kg × $ 6.35 ) - 68

Relevant costs of material = $ 1,143 - $ 68. = $ 1,075.

Thus the correct option is----------B i.e $ 1,075.

Feel free to comment doubts if any..