Lampshire Inc. is considering using stocks of an old raw material in a special p
ID: 2481302 • Letter: L
Question
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 $2,136 in total. If the company were to buy new supplies of this raw material on the open market, it would cost $7.75 per kilogram. However, the company has no other use for this raw material and would sell it at the discounted price of $7.05 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 $85 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?
$1,128
$1,240
$1,234
$1,043
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 $2,136 in total. If the company were to buy new supplies of this raw material on the open market, it would cost $7.75 per kilogram. However, the company has no other use for this raw material and would sell it at the discounted price of $7.05 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 $85 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?
Explanation / Answer
Solution:
Original cost of the material i.e, $2136 is sunk cost and hence irrelevant.
Current purchase price also irrelevant since there is no question of purchasing it.
Relevant cost = 7.05*160 - 85
= $ 1043
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