Corporation A is considering using stocks of an old raw material in a special project. The special project would require all 120 kilograms of the raw material that are in stock that orginially cost the company $816 in total. Of 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 $6.75 per kilogram if it were not used in this special project. The sale of the raw material would involve delivery to the purchaser at a total cost of $50 for all 120 kilograms. What is the relevant cost of the 120 kilograms of the raw material when deciding whether to proceed with the special project? Please explain and show how you got your answer
Answer: the relevant cost of the 120 kilograms = $ 760
Working notes for the above answer is as under
We have been provided with the information that,
The special project would require all 120 kilograms of the raw material
Raw material cost in open market is $7.25 per kilogram.
If t were not used in this special project the RM sold at 6.75
Now we calculate relevant cost as follow
$ 6.75 per kg. x 120 k.g.
=$ 810
Nor relevant cost
=$ 810 – shipping cost ( becuse it is Irrelevant)
=$ 810-50
=$ 760 ,
