Roddey 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 2,900 units of component GEE. Each unit of GEE requires 3 units of material R39 and 8 units of material I59. Data concerning these two materials follow: Material R39 is in use in many of the company's products and is routinely replenished. Material I59 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 GEE?
A)$224,605
B)$196,765
C)$228,204
D)$193,285

Question

Roddey 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 2,900 units of component GEE. Each unit of GEE requires 3 units of material R39 and 8 units of material I59. Data concerning these two materials follow:  Material R39 is in use in many of the company's products and is routinely replenished. Material I59 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 GEE?
A)$224,605 
B)$196,765 
C)$228,204 
D)$193,285

Quizplus · Accepted Answer

The relevant cost of the materials for determining the minimum acceptable price would be the opportunity cost of using the materials for GEE production instead of their next best alternative use. Since material R39 is routinely replenished, its opportunity cost is the market price, which is given as $17.50 per unit. However, material I59 is no longer used in any normal products, and its existing stocks would not be replenished. Therefore, the opportunity cost of using material I59 is its disposal cost, which is the cost of selling it as scrap. From the data given, there is no information on the disposal cost of material I59. Hence, we cannot use material I59 in production without incurring a cost. Therefore, the relevant cost of materials for calculating the minimum acceptable price would be the cost of material R39 only, which would be 2,900 units × 3 units per unit × $17.50 per unit = $152,625. Adding any additional costs such as labor, overheads, and profit margin to this cost would give the minimum acceptable price for the order.

Thus, the correct option is B) $196,765.

Roddey Corporation Is a Specialty Component Manufacturer with Idle Capacity