Mankus Inc. is considering using stocks of an old raw material in a special project. The special project would require all 120 kilograms of the raw material that are in stock and that originally cost the company $816 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 $6.75 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 $50 for all 120 kilograms. What is the relevant cost of the 120 kilograms of the raw material when deciding whether to proceed with the special project?
A)$810
B)$870
C)$760
D)$816

Question

Quizplus · Accepted Answer

The relevant cost is the opportunity cost of using the material in the project, which is the net cash inflow forgone by not selling it. The selling price is $6.75 per kg, totaling $810 (120 kg x $6.75), minus $50 delivery cost, resulting in $760.