Nowak 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 1,600 units of component FHB. Each unit of FHB requires 8 units of material N95 and 1 unit of material K78. Data concerning these two materials follow:
Material N95 is in use in many of the company's products and is routinely replenished. Material K78 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 FHB?

Question

Nowak 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 1,600 units of component FHB. Each unit of FHB requires 8 units of material N95 and 1 unit of material K78. Data concerning these two materials follow: 
Material N95 is in use in many of the company's products and is routinely replenished. Material K78 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 FHB?

Quizplus · Accepted Answer

The cost of material N95 is not relevant because it is routinely replenished, meaning it is a variable cost and will be incurred regardless of whether or not the company takes on this order. The cost of material K78 is relevant because it is a special order and the company would need to purchase additional units to fulfill the order. Based on the table, the relevant cost of 1 unit of material K78 is $2.75. Therefore, the total relevant cost for 1,600 units of FHB would be $2.75 x 1,600 = $4,400. Adding this to the fixed cost per unit of FHB ($34) gives a minimum acceptable price of $62.135 per unit. So, the correct answer is option C.

Nowak Corporation Is a Specialty Component Manufacturer with Idle Capacity