Question

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 8,900 kilograms of theolite. Intercontinental does not use theolite for its regular product, but the firm has 8,900 kilograms of the chemical on hand from the days when it used theolite regularly. The theolite could be sold to a chemical wholesaler for 14,500 p. The book value of the theolite is 2.90 p per kilogram. Intercontinental could buy theolite for 3.30 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 0.104 U.S. dollar.)

Required:

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

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

What is the relevant cost of theolite for the purpose of analyzing the special-order decision? (Enter your answer in pesos.)

Relevant cost:  

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

Answer 1

1 A. The relevant cost of the theolite to be used in producing the special order is the 14,700 p sales value that the company will forgo if it uses the chemical. In other word, Since the product is not used regularly, The relevant cost will be equal to the opportunity cost i.e. selling price to the wholesaler

Hence, Relevant cost = 14500 p

1B. This is an example of opportunity cost.

* Opportunity cost is a cost of the forgone benefit that would have been derived by an option not chosen.