Bosques Corporation has in stock 35,800 kilograms of material L that it bought f

Question

Bosques Corporation has in stock 35,800 kilograms of material L that it bought five years ago for $5.55 per kilogram. This raw material was purchased to use in a product line that has been discontinued. Material L can be sold as is for scrap for $1.67 per kilogram. An alternative would be to use material L in one of the company's current products, Q08C, which currently requires 2 kilograms of a raw material that is available for $9.15 per kilogram. Material L can be modified at a cost of $0.78 per kilogram so that it can be used as a substitute for this material in the production of product Q08C. However, after modification, 4 kilograms of material L is required for every unit of product Q08C that is produced. Bosques Corporation has now received a request from a company that could use material L in its production process. Assuming that Bosques Corporation could use all of its stock of material L to make product Q08C or the company could sell all of its stock of the material at the current scrap price of $1.67 per kilogram, what is the minimum acceptable selling price of material L to the company that could use material L in its own production process?

$5.365 per kg

$3.795 per kg

$2.133 per kg

$1.675 per kg

Explanation / Answer

SOLUTION

Minimum acceptable selling price of material L to the company that could use material L in its own production process is $3.795 per kg.

Amount ($) Cost of alternative material to produce a unit of Q08C:(2 kgs * $9.15 per kg) 18.30 Cost of using material L to produce a unit of Q08C: (4 kgs * $0.78 per kg) 3.12 Savings from using material L to produce a unit of Q08C (a) 15.18 Kilograms of material L per unit of Q08C (b) 4 kgs Value per kg of material L when used to produce Q08C (a) / (b) $3.795 per kg

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