Janus Corporation has in stock 43,700 kilograms of material L that it bought five years ago for $6.10 per kilogram.This raw material was purchased to use in a product line that has been discontinued.Material L can be sold as is for scrap for $3.23 per kilogram.An alternative would be to use material L in one of the company's current products,E99D,which currently requires 2 kilograms of a raw material that is available for $9.45 per kilogram.Material L can be modified at a cost of $0.62 per kilogram so that it can be used as a substitute for this material in the production of product E99D.However,after modification,3 kilograms of material L is required for every unit of product E99D that is produced.Janus Corporation has now received a request from a company that could use material L in its production process.Assuming that Janus Corporation could use all of its stock of material L to make product E99D or the company could sell all of its stock of the material at the current scrap price of $3.23 per kilogram,what is the minimum acceptable selling price of material L to the company that could use material L in its own production process?
A)$3.23
B)$5.68
C)$6.92
D)$2.45

Question

Quizplus · Accepted Answer

The minimum acceptable selling price is the opportunity cost of using material L in product E99D. The cost to modify material L is $0.62 per kilogram, and 3 kilograms are needed to replace 2 kilograms of the $9.45 material. Thus, the cost per kilogram of material L is ($9.45 * 2/3) + $0.62 = $6.92. However, since the material can be sold for $3.23, the opportunity cost is $6.92 - $3.23 = $3.69. Therefore, the minimum acceptable selling price is $5.68, which is the cost of using material L in product E99D minus the scrap value.

Janus Corporation Has in Stock 43,700 Kilograms of Material L