Question

Exercise 14-36 Special Order (LO 14-4, 14-5) [The following information applies to the questions displayed below.) Intercontinental Chemical Company, located in Buenos Aires, Argentina, recently received an order for a product it does not normally produce. Since the company has excess production capacity management is considering accepting the order. In analyzing the decision, the assistant controller is compiling the relevant costs of producing the order Production of the special order would require 8.200 kilograms of theolite. Intercontinental does not use theolite for its regular product, but the firm has 8,200 kilograms of the chemical on hand from the days when it used theolite regularly. The theolite could be sold to a chemical wholesaler for 15,500 p. The book value of the theolite is 270 p per kilogram Intercontinental could buy theolite for 3.10 p per kilogram. (p denotes the peso, Argentina's national monetary unit. Many countries use the peso as their unit of currency. On the day this exercise was written, Argentina's peso was worth 0.104 US dollar) Exercise 14-36 Part 1 Required: 1-a. What is the relevant cost of theolite for the purpose of analyzing the special-order decision? 1-b. The relevant cost of theolite for the purpose of analyzing the special order decision is an example or

Answer 1

1a. The relevant cost for special order would be the sales value of theolite as this will be opportunity cost i.e. foregone if chemical is used.

Relevant cost = 15,500p

1b.This case is an example of opportunity cost. Opportunity cost are benefits foregone in lieu of current proposal assuming current is more beneficial in general case.

2.

	Amount	Explanation
Sales value	15,500 p	Relevant cost for decision
Book value ( 8200 X 2.7)	22,140	Irrelevant cost as this has been incurred.
Current purchase cost (8200 * 3.1)	25,420	This is also irrelevant as the company has opted against purchase of theolite

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