[The following information applies to the questions displayed below.] Global Che

Question

[The following information applies to the questions displayed below.]

Global Chemical Company, located in Buenos Aires, Argentina, recently received an order for a product it does not normally produce. Since the company has excess production capacity, management is considering accepting the order. In analyzing the decision, the assistant controller is compiling the relevant costs of producing the order. Production of the special order would require 8,100 kilograms of theolite. Global does not use theolite for its regular product, but the firm has 8,500 kilograms of the chemical on hand from the days when it used theolite regularly. The theolite could be sold to a chemical wholesaler for 15,300 p. The book value of the theolite is 9.10 p per kilogram. Global’s could buy theolite for 9.30 p per kilogram. ( p denotes the peso, Argentina’s national monetary unit. Many countries use the peso as their unit of currency. On the day this exercise was written, Argentina’s peso was worth .1891 U.S. dollars.)

Global’s special order also requires 1,100 kilograms of genatope, a solid chemical regularly used in the company’s products. The current stock of genatope is 8,100 kilograms at a book value of 9.10 p per kilogram. If the special order is accepted, the firm will be forced to restock genatope earlier than expected, at a predicted cost of 9.70 p per kilogram. Without the special order, the purchasing manager predicts that the price will be 9.30 p when normal restocking takes place. Any order of genatope must be in the amount of 6,400 kilograms.

1.) What is the relevant cost of genatope?

2.) Identify the relevance of each of the figures given in the exercise in terms of making the special-order decision:

(a) Book value of inventory

(b) Quantity to be used in the special order

(c) Predicted cost if next order is placed early

(d) Predicted cost if next order is placed on time

Explanation / Answer

Global Chemical Company All Amounts in $ 1. The relevant cost of producing the order will be Theolite 8100 kgs X Peso 9.10 X .01891 = 13939 $ Genatope 1100 kgs X Peso 9.10 X 0.1891 = 1893 $ 15831 $ 2. (a) Book value of inventory will be used for the costing of the new product, since normally inventory is to be valued at a lower of cost or market value, based on the standard Accounting Practices. (b) Quantity to be used in the special order is required, since that helps determine the costing of the product based on the existing prices, depending on the stock of the material on hand. (c) Predicted cost if material is booked early is always lower and will help determine the best reorder quantity, depending on the structure of the Company's products, and demand for any such special products in future. (d) Predicted cost if order is placed on time, helps determine the market scenario for the products to be reordered. Like in © above, the quantity and demand for special products helps determine the inventory levels of the Company.

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