Hamby Corporation is preparing a bid for a special order that would require 780 liters of material W34C. The company already has 640 liters of this raw material in stock that originally cost $8.30 per liter. Material W34C is used in the company's main product and is replenished on a periodic basis. The resale value of the existing stock of the material is $7.60 per liter. New stocks of the material can be readily purchased for $8.35 per liter. What is the relevant cost of the 780 liters of the raw material when deciding how much to bid on the special order?
A) $6,481
B) $6,376
C) $6,513
D) $5,928

Question

Quizplus · Accepted Answer

To determine the relevant cost of the additional 780 liters of material W34C, we need to consider the following costs:

1. The cost of the 640 liters of material currently in stock - this is equal to the original cost minus the resale value:
$8.30 - $7.60 = $0.70 per liter

2. The cost of purchasing additional material - this is equal to the purchase price:
$8.35 per liter

To determine the total relevant cost, we need to apply the weighted average method:

Total relevant cost = (640 liters x $0.70 per liter) + (780 liters x $8.35 per liter) / (640 liters + 780 liters)
= $448 + $6,513 / 1,420 liters
= $6,961 / 1,420 liters
= $4.90 per liter

Therefore, the relevant cost of the 780 liters of material W34C is $4.90 per liter.

The best choice is C.

Hamby Corporation Is Preparing a Bid for a Special Order