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)

Question

Drew Wheeler

Business

23 September, 16:35

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)

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Marissa · Answer 1

Relevant costs:

Selling price = 6.50

Delivery = $125

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