Lampshire Inc. is considering using stocks of an old raw material in a special p
ID: 2475848 • Letter: L
Question
Lampshire Inc. is considering using stocks of an old raw material in a special project. The special project would require all 150 kilograms of the raw material that are in stock and that originally cost the company $2,366 in total. If the company were to buy new supplies of this raw material on the open market, it would cost $8.00 per kilogram. However, the company has no other use for this raw material and would sell it at the discounted price of $7.30 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 $72 for all 150 kilograms. What is the relevant cost of the 150 kilograms of the raw material when deciding whether to proceed with the special project?
$1,178
$1,095
$1,023
$1,200
Lampshire Inc. is considering using stocks of an old raw material in a special project. The special project would require all 150 kilograms of the raw material that are in stock and that originally cost the company $2,366 in total. If the company were to buy new supplies of this raw material on the open market, it would cost $8.00 per kilogram. However, the company has no other use for this raw material and would sell it at the discounted price of $7.30 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 $72 for all 150 kilograms. What is the relevant cost of the 150 kilograms of the raw material when deciding whether to proceed with the special project?
Explanation / Answer
Relevant costing concept is best suited for the given situation
If purchasing from out side the raw material will cost = 150*8 = 1200$
Alternative use of raw material or opportunity cost = (((2366/150)-7.3)*150)-72 = 1178
Therefore least of the above would be the relevant costTherefore 1178 is raw material cost for decision making.
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