A manufacturer of breakfast cereals has the opportunity to purchase barley at $3.00 a kilo for 10 000 kilos, if it also buys 5 000 kilos of wheat at $16.00 per kilo. However, the manufacturer does not use any barley in its products, and currently needs 20 000 kilos of wheat. If the current market price of barley is $3.80 per kilo, and wheat is $15.80 per kilo, should this opportunity be taken, and why?

Question

Quizplus · Accepted Answer

The opportunity should be evaluated based on the cost savings or additional costs it presents. Buying 10,000 kilos of barley at $3.00 instead of the market price of $3.80 saves $0.80 per kilo, totaling a savings of $8,000. For wheat, buying 5,000 kilos at $16.00 instead of the market price of $15.80 costs an extra $0.20 per kilo, totaling an additional cost of $1,000. Therefore, the net savings is $7,000 ($8,000 savings on barley minus $1,000 additional cost for wheat), making the opportunity valuable despite the company not using barley in its products. The remaining 15,000 kilos of wheat needed can be purchased at the market price.

A Manufacturer of Breakfast Cereals Has the Opportunity to Purchase