Question

(a) Ahmed Manufacturing LLC is considering using stocks of an old raw material in a special project. The special project would require all 210 kilograms of the raw material that are in stock and that originally cost the company OMR1,804 in total. If the company were to buy new supplies of this raw material on the open market, it would cost OMR8.55 per kilogram. However, the company has no other use for this raw material and would sell it at the discounted price of OMR7.75 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 OMR79.00 for all 210 kilograms. (i) Calculate the relevant costs of the 210 kilograms of the raw material when deciding whether to proceed with the special project; and (ii) Explain why you consider such costs as relevant to the decision. (b) Ahmed Manufacturing LLC is a specialty component manufacturer with idle capacity. Management would like to use its extra capacity to generate additional profits. A potential customer has offered to buy 1,600 units of component Y. Each unit of Y requires 8 units of material X and 1 unit of material Z. Data concerning these two materials are given below: Material Units in Stock Original Cost/Unit Current market Price/unit Disposal Value/unit X 4,280 OMR4.20 OMR3.85 OMR3.65 Z 1,500 OMR9.30 OMR9.30 OMR7.95 Material X is in use in many of the company's products and is routinely re-stock. Material Z is no longer used by the company in any of its normal products and existing stocks would not be re-stock once they are used up. Calculate the minimum acceptable price for the order for component Y (c) The management of Ahmed Manufacturing LLC is considering dropping product RC. Data from the company's accounting system appear below: Sales OMR130,000 Variable Costs OMR65,000 Fixed manufacturing Costs OMR49,000 Fixed Selling and Administrative Costs OMR35,000 In the company's accounting system, all fixed expenses are fully allocated to products. Further investigation has revealed that 30% of the fixed manufacturing expenses and 20% of the fixed selling and administrative expenses are avoidable if product RC is discontinued. What would be the effect on the company's overall net operating income if product RC were dropped?

Answer 1

A. Answer is 1,548.50 OMR

1. Calculation of Relevant cost of 210 Kg.

= ( 210 kg x 7.75 OMR ) - delivery expense of 79 OMR

= 1,627.50 - 79 = 1,548.50 OMR

2. Relevant cost here would be the opportunity cost of using these old raw materials in special order production.

B. Answer is 62,135 OMR

Material X:

Total cost = Total quantity required × Current market price

(1,600 × 8) × 3.85

= 12,800 × 3.85 = 49,280

Total cost material X : 49,280

Material z:

Total quantity required (1,600 × 1) = 1,600

Relevant cost of in hand stock (1,500 × 7.95) = 11,925

Material Z to be purchased { (1,600 - 1,500) × 9.30 } = 930

Total (11,925 + 930) = 12,855

Hence, relevant cost for 1,600 units (49,280 + 12,855) = 62,135 OMR

C. Answer

Particulars. RC continue. If RCdiscontinue

Sales. 130,000. (130,000)

Less:

Variable cost. 65,000. (65,000)

Contribution. 65,000. 65,000

Fixed Expense:

Fixed mfg. Exp. 49,000. 34,300

(49000-14700)

Sell&admn.exp. 35,000. 28,000

(35,000 - 7,000)

Total fixed Exp. 84,000. 62,300

Net operating

Income. (19,000). (2,700)

Decrease in operating income due to discontinue of RC ( 19,000 + 2,700) = 16,300 OMR

Hence, the production and sale of the product RC not be discontinued . If RC is discontinued, the net operating income of the company will decrease by 16,300 OMR