Question

Required information

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Intercontinental 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 8,800 kilograms of theolite. Intercontinental does not use theolite for its regular product, but the firm has 8,800 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 3.80 p per kilogram. Intercontinental could buy theolite for 4.20 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 .104 U.S. dollar.)

Required:

1. 1-a. What is the relevant cost of theolite for the purpose of analyzing the special-order decision?
2. 1-b. The relevant cost of theolite for the purpose of analyzing the special-order decision is an example of:

Answer 1

Solution:-

1-a. What is the relevant cost of theolite for the purpose of analyzing the special-order decision:-

Relevant Cost

15,300 p

Explanation:-

As company not uses theolite regular so the purchase price and book value will be consider as sunk cost. Selling price of 15,300 p tholite will be consider as opportunity cost. hence the relevant cost would be 15,300 p.

1-b. The relevant cost of theolite for the purpose of analyzing the special-order decision is an example of:-

Opportunity cost.

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