Question

Lafferty Corporation is a specialty component manufacturer with Idle capacity. Management would like to use its unused capacity to generate additional profits. A potential customer has offered to buy 6,330 units of component Rocket. Each unit of Rocket requires 8 units of material CES4 and 6 units of material XES7. Data concerning these two materials follow: Material CES4 XEST Units in Stock 45,420 32,360 Original Cost Per Unit $4.06 $9.56 Current Market Price Per Unit $ 4.00 $10.25 Disposal Value Per Unit $3.36 $9.00 Material CES4 Is In use In many of the company's products and is routinely replenished. Material XES7 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 Rocket? (CIMA adapted) Multiple Choice $543,300 $595,501 oooo $551,405 $590.230

Answer 1

Material CES4:
Total quantity required	50640	=6330*8
X Current market price	4
Total cost	202560
Material XES7:
Total quantity required	37980	=6330*6
Relevant cost of in hand stock	291240	=32360*9
Material XES7 to be purchased	57605	=(37980-32360)*10.25
Total	348845
Total relevant cost for 6330 units	551405	=202560+348845
Option C $551,405 is correct