Question

Global 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 9,700 kilograms of theolite. Global does not use theolite for its regular product, but the firm has 9,700 kilograms of the chemical on hand from the days when it used theolite regularly. The theolite could be sold to a chemical wholesaler for 14,700 p. The book value of the theolite is 2.80 p per kilogram Global could buy theolite for 3.20 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 .1891 U.S. dollars.) Exercise 14-39 Part 1 Required: 1-a. what is the relevant cost of theolite for the purpose of analyzing the special-order decision? Relevant cost 1-b. The relevant cost of theolite for the purpose of analyzing the special-order decision is an example of: Opportunity cost O Historical cost Sunk cost Identify the relevance of each of the numbers given in the exercise in making the decision. 2. (a) Sales value (b) Book value (c) Current purchase cost

Answer 1

SOLUTION

1A. The relevant cost of the theolite to be used in producing the special order is the 14,700 p sales value that the company will forgo if it uses the chemical.

1B. This is an example of opportunity cost.

2. a. Sales value = 14,700 p (Discussed in part 1A)

b. Book value = 9,700 kilograms * 2.80 p per kilograms = 27,160 p (It will be irrelevant since the book value is a sunk cost)

c. Current purchase cost = 9,700 kilograms * 3.20 p per kilograms = 31,040 p (It will be irrelevant since the company will not be buying any theolite)