Global Chemical Company, located in Buenos Aires, Argentina, recently received a

Question

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 8,500 kilograms of theolite. Global does not use theolite for its regular product, but the firm has 9,400 kilograms of the chemical on hand from the days when it used theolite regularly. The theolite could be sold to a chemical wholesaler for 15,500 p. The book value of the theolite is 9.30 p per kilogram. Global’s could buy theolite for 9.50 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 8,500 kilograms at a book value of 9.30 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 9.90 p per kilogram. Without the special order, the purchasing manager predicts that the price will be 9.50 p when normal restocking takes place. Any order of genatope must be in the amount of 5,500 kilograms. What is the relevant cost of genatope?

Explanation / Answer

Solution:

Relevant cost of genatope for special order = (1,100 KG * 9.90) + (5500 - 1100) * (9.90 - 9.50)

= 12650 p

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