Question

Exercise 14-37 Special Order (LO 14-4, 14-5) [The following information applies to the questions displayed below) Intercontinental's special order requires 1100 kilograms of genatope, a solid chemical regularly used in the company's products The current stock of genatope is 10,000 kilograms at a book value of 9.60 p per kilogram. If the special order is accepted, the firm will be forced to restock genatope earlier than expected, at a predicted cost of 10.20 p per kilogram Without the special order, the purchasing manager predicts that the price will be 9.80 p when normal restocking takes! ploce. Any order of genatope must be in the amount of 6.800 kilograms. Exercise 14-37 Part 1 Required: 1. What is the relevant cost of genatope? (Enter your answer in pesos Total relevant cost

Answer 1

Relevant costs are the ones which will be incurred only if the special order is accepted. Costs which are affected by special order are called relevant costs.

(1) Gena top relevant cost

cost of replacing 1100 kilograms to be used in special order (1100Kg*10.20p)	11,220p
Additional cost incurred on next order due early placing of an order additional quantity (6800 minimum-1100 as above)=5700 kilograms*(10.20p-9.80p) = 5700*0.4=2,280	2,280 p
Total relevant costs [11,220 p+2,280 p]	13,500 p

minimum order is 6800 kilograms so rest (6800 minimu-1100used in special order) 5700 kilograms will have to be purchased at higher cost of 10.20 p instead of 9.80 p.

(2) Relevant costs

• Book Value = 10,000*9.60p= 96,000 p is irrelevant for the decision making as it is not affected by special order decision.
• Quantity to be used in special order: Relevant   as we can see above calculation that 1100 kgs are used to find relevant cost. so the quantity is relevant for the decision making.
• predicted cost if order placed early: Yes, Relevant for the decision making. As the used Genatope has to be replaced with new one this cost is relevant.
• predicted cost if order place on time:Relevant.To find the higher amount to be paid for early order on 5700 kilograms this cost is required. 9.80 p is the cost if order placed on time however , we will pay 10.20 p so (9.80-10.20) =0.4p is the premium cost per kilogram for special order .