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?
A) $5.36
B) $3.80
C) $2.13
D) $1.67

Explanation / Answer

Cost of Mat L incurred at rate of $5.55 per Kg is a sunk cost & is not relevant in decision making. We need to consider scrap rate of $1.67per kg & opportunity cost of using Mat L for making prod Q08C. If Raw Mat is bought, It costs $9.15 per kg. 2 Kg is needed pu. SO Total Cost = 9.15*2=18.30 So Equivalent cost as compare to 4kg of L is 18.30/4 = $4.58 Per Kg modification cost of L is $0.78 ----------------------------------------------- So Addl cost needed for Raw Mat bought = 4.58-0.78= $3.80 SO minimum acceptable selling price of material L will be $3.80

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