Lampshire Inc. is considering using stocks of an old raw material in a special project. The...

Lampshire Inc. is considering using stocks of an old raw material in a special project. The special project would require all 160 kilograms of the raw material that are in stock and that originally cost the company $2,336 in total. If the company were to buy new supplies of this raw material on the open market, it would cost $7.85 per kilogram. However, the company has no other use for this raw material and would sell it at the discounted price of $7.15 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 $87 for all 160 kilograms. What is the relevant cost of the 160 kilograms of the raw material when deciding whether to proceed with the special project?

Expert Solution

Ans. Calculation of Relevant cost of Raw Material

Required Raw material is avialable in stock of the company

if it is not used in the special project, it will be sell in the market

Revenue from raw material if it is sold in open market

Selling price per kg $7.15

Total sale value (7.15X160) = $1144

Less: cost incurred during the sale of raw material = ($87)

Net opportunity cost or profit = $1057

So Relevant cost of raw material 160 kg . = $1057

That means if company not used in the special project, it should be sale and from the selling net profit will be 1057 that will be relevant cost of raw material.

ekkarill92 answered 1 year ago

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