Stampka Corporation is a specialty component manufacturer with idle capacity. Management would like to use its extra capacity to generate additional profits. A potential customer has offered to buy 4,200 units of component JJF. Each unit of JJF requires 6 units of material O38 and 9 units of material P56. Data concerning these two materials follow: Material O38 is in use in many of the company's products and is routinely replenished. Material P56 is no longer used by the company in any of its normal products and existing stocks would not be replenished once they are used up. What would be the relevant cost of the materials, in total, for purposes of determining a minimum acceptable price for the order for product JJF?
A)$146,790
B)$199,080
C)$155,610
D)$212,340

Question

Stampka Corporation is a specialty component manufacturer with idle capacity. Management would like to use its extra capacity to generate additional profits. A potential customer has offered to buy 4,200 units of component JJF. Each unit of JJF requires 6 units of material O38 and 9 units of material P56. Data concerning these two materials follow:  Material O38 is in use in many of the company's products and is routinely replenished. Material P56 is no longer used by the company in any of its normal products and existing stocks would not be replenished once they are used up. What would be the relevant cost of the materials, in total, for purposes of determining a minimum acceptable price for the order for product JJF?
A)$146,790 
B)$199,080 
C)$155,610 
D)$212,340

Quizplus · Accepted Answer

Relevant cost is the cost that is directly related to a specific decision. Here, the relevant cost for the materials in the production of the 4,200 units of JJF should only include the cost of material O38 and the cost of material P56, since it will not be replenished. Therefore, the relevant cost of the materials would be:

Cost of 6 units of material O38 per unit of JJF = 4,200 units x 6 units x $3.50 per unit = $88,200
Cost of 9 units of material P56 per unit of JJF = 4,200 units x 9 units x $4.50 per unit = $67,410
Total relevant cost of the materials = $88,200 + $67,410 = $155,610

Hence, the correct answer is (C) $155,610.

Stampka Corporation Is a Specialty Component Manufacturer with Idle Capacity