Answer to Question #208709 in Economics for Pooh

Question

INCREMENTAL ANALYSIS AND PRODUCT PRICING (45 Marks)

PART A Special Order for a Manufacturer

World Chemical Company recently received an order for a product that it does not normally produce. Since the company has spare production capacity, the management is considering accepting the special order. In analysing the decision, the graduate accountant is compiling the relevant costs of producing the special order. The production of the special order would require 7 000 kilograms of gelatine genotype (GG). The company does not use GG for its regular products, but the company has 7 000 kilograms of the chemical on hand from the days when it used GG regularly. GG could be sold to a chemical wholesaler for $15 000. The carrying amount of GG is $5 per kilogram. The company could buy the chemical for $6 per kilogram.

REQUIRED:

A. What is the relevant cost of the chemical for the purpose of analysing the special order decision? (5 Marks)

Answer 1

Consider the possible options for assessing the cost of raw materials (materials, goods): the cost of past costs (initial cost or acquisition cost) is widely used in accounting; replacement cost is the current cost of restoring the stock of raw materials (materials, goods), i.e. the cost at which raw materials (materials, goods) can be purchased from suppliers at the present time; cost of possible realization - the estimated cost at which raw materials (materials, goods) can be sold at the present time.