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Otool Inc. is considering using stocks of an old raw material in a special project. The...

Otool Inc. is considering using stocks of an old raw material in a special project. The special project would require all 170 kilograms of the raw material that are in stock and that originally cost the company $2,436 in total. If the company were to buy new supplies of this raw material on the open market, it would cost $6.90 per kilogram. However, the company has no other use for this raw material and would sell it at the discounted price of $6.20 per kilogram if it were not used in the special project. The sale of the raw material would involve delivery to the purchaser at a total cost of $65 for all 170 kilograms. What is the relevant cost of the 170 kilograms of the raw material when deciding whether to proceed with the special project?

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Answer #1

Relevant cost here would be the 'opportunity cost' of using these old raw materials in special order production

= (170*6.20) - delivery expenses 65

= 1054 - 65

= $989
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