Bakla

1 Chapter 13 Relevant Costs for Decision Making Handout 1. D Inc. has some material that originally cost $74,600. The material has a scrap value of $57,400 as is, but if reworked at a cost of $1,500, it could be sold for $54,400. What would be the incremental effect on the company's overall profit of reworking and selling the material rather than selling it as is as scrap? Solution: Incremental revenue from reworking ($54,400 $1,500) ........ $52,900 Less incremental revenue from selling as scrap ........................ 57,400 Net loss from reworking ............................................................ ($ 4,500)

2. E Corporation has in stock 16,100 kilograms of material R that it bought five years ago for $5.75 per kilogram. This raw material was purchased to use in a product line that has been discontinued. Material R can be sold as is for scrap for $3.91 per kilogram. An alternative would be to use material R in one of the company's current products, S88Y, which currently requires 2 kilograms of a raw material that is available for $7.60 per kilogram. Material R can be modified at a cost of $0.77 per kilogram so that it can be used as a substitute for this material in the production of product S88Y. However, after modification, 4 kilograms of material R is required for every unit of product S88Y that is produced. The firm has now received a request from a company that could use material R in its production process. Assuming that the firm could use all of its stock of material R to make product S88Y or the company could sell all of its stock of the material at the current scrap price of $3.91 per kilogram, what is the minimum acceptable selling price of material R to the company that could use material R in its own production process? Solution: Product S88Y: Current cost (2 kg @ $7.60): $15.20 If material R were used, 4 kilograms would be needed. It currently costs $15.20 for Product S88Y; to maintain this same cost, material R would need to cost $3.03...