Question

Tara Inc. is considering using stocks of an old raw material in a special project. The special project would require all 360 kilograms of the raw material that are in stock and that originally cost the company $2,520 in total. If 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 $6.50 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 $125 for all 360 kilograms. What is the relevant cost of the 360 kilograms of the raw material when deciding whether to proceed with the special project? (CIMA adapted)

Answer 1

Relevant costs:

Selling price= 6.50

Delivery= $125

Step-by-step explanation:

Giving the following information:

The special project would require all 360 kilograms of the raw material that are in stock and that originally cost the company $2,520 in total.

If 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 $6.50 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 $125 for all 360 kilograms.

The relevant costs are those that affect the decision moving forward. Costs that occurred in the past musn't be taken into account.

Relevant costs:

Selling price= 6.50

Delivery= $125