Tara 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 $1,136 in total. If the company were to buy new supplies of this raw material on the open market, it would cost $7.25 per kilogram. However, the company has no other use for this raw material and would sell it at the discounted price of $6.50 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 $75.00 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? (CIMA adapted)
A) $1,040
B) $965
C) $1,136
D) $1,160

Question

Quizplus · Accepted Answer

The relevant cost is the opportunity cost of using the material, which is the net realizable value if sold: (160 kg * $6.50) - $75 delivery cost = $965.

Tara Inc Is Considering Using Stocks of an Old Raw Material