Question

Relevant Costing—Buying Decision—Argos Company

Argos Company needs a total of 125 tonnes of sheet steel—50 tonnes of 2-inch width and 75 tonnes of 4-inch width—for a customer's job. Argos can purchase the sheet steel in these widths directly from a steel manufacturer (Actium Corporation) or it can purchase sheet steel from Actium that is 24 inches wide and have it slit into the desired widths by Heraclion Inc. Both vendors are local and have previously supplied materials to Argos.

Heraclion specializes in slitting sheet steel provided by a customer into any desired width. When negotiating a contract, Heraclion tells its customers there is a scrap loss in the slitting operation, but this loss has never exceeded 2.5 percent of input tonnes. Heraclion recommends if a customer has a specific tonnage requirement, it should supply an adequate amount of steel to yield the desired quantity. Heraclion's charges for steel slitting are based on good output, not input handled.

The 24-inch wide sheet steel is a regular stock item of Actium and can be shipped to Heraclion within five days after receipt of Argos's purchase order. If Actium is to do the slitting, shipment to Argos would be scheduled for 15 days after receipt of Argos's purchase order. Heraclion has quoted delivery at 10 days after receipt of the sheet steel. In prior dealings, Argos has found both Actium and Heraclion to be reliable vendors with high quality products.

Argos has received the following price quotations from Actium and Heraclion:

Actium Corporation Rates
Size	Gauge		Quantity		Cost Per Tonne
2-inch	14		50	tonnes	$210
4-inch	14		75	tonnes	200
24-inch	14		125	tonnes	180

Heraclion Inc. Steel Slitting Rates
Size	Gauge		Quantity		Price Per Tonne of Output
2-inch	14		50	tonnes	$18
4-inch	14		75	tonnes	15

Freight and Handling Charges
Destination	Cost Per Tonne
Actium to Argos	$10.00
Actium to Heraclion	5.00
Heraclion to Argos	7.50

In addition, Heraclion informed Argos that if it purchases 100 output tonnes of each width, the per-tonne slitting rates would be reduced 12 percent. Argos knows the same customer will be placing a new order in the near future for the same material and estimates it would have to store the additional tonnage for an average of two months at a carrying cost of $1.50 per month for each tonne. There would be no change in Actium's prices for additional tonnes delivered to Heraclion.

Required:

Answer 1