Bosques Corporation has in stock 35,800 kilograms of material L that it bought five years ago for $5.55 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 $1.67 per kilogram. An alternative would be to use material L in one of the company's current products, Q08C, which currently requires 2 kilograms of a raw material that is available for $9.15 per kilogram. Material L can be modified at a cost of $0.78 per kilogram so that it can be used as a substitute for this material in the production of product Q08C. However, after modification, 4 kilograms of material L is required for every unit of product Q08C that is produced. Bosques Corporation has now received a request from a company that could use material L in its production process. Assuming that Bosques Corporation could use all of its stock of material L to make product Q08C or the company could sell all of its stock of the material at the current scrap price of $1.67 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?

Question

Quizplus · Accepted Answer

First, let's calculate the cost of modifying material L:

Cost of modification = $0.78 per kilogram

Next, let's calculate the cost of using material L as a substitute for the raw material currently required for product Q08C:

Cost of using material L for Q08C = (2 kg of original material at $9.15/kg) + (4 kg of modified material L at $5.55 + $0.78 = $6.33/kg) = $29.28

Now, let's compare the two options:

Option 1: Selling material L as scrap

Revenue from selling material L as scrap = 35,800 kg x $1.67/kg = $59,886

Option 2: Using material L for product Q08C

Cost of producing Q08C with material L = $29.28 per unit

Assuming Bosques Corporation wants to make a profit on the sale of material L to the other company, the minimum acceptable selling price would be equal to the cost of producing Q08C with material L:

Minimum acceptable selling price = $29.28 per unit = ($5.55 + $0.78) x 4 kg + $9.15 x 2 kg

Minimum acceptable selling price = $3.795 per kg

Therefore, the best choice is B, with a minimum acceptable selling price of $3.795 per kg.

Bosques Corporation Has in Stock 35,800 Kilograms of Material L