Reference no: EM132323992

Question:

Q1A:

International Chemical Company (ICC) recently received an order for a product that it does not normally produce. Since the company has spare production capacity, management is considering accepting the order In analysing the decision, the assistant accountant is compiling the relevant costs of producing the order Production of the special order would require 8000 kilograms of theolite.

International Chemical Company does not use theolite for its regular product, but the firm has 8000 kilograms of the chemical on hand from the days when it used theolite regularly. The theolite could be sold to a chemical wholesaler for $29000. The carrying amount of the theolite is $4 per kilogram. International Chemical Company could buy theolite for $4.80 per kilogram.

Required:

1. What is the relevant cost of theolite for the purpose analysing the special order decision?

2. Discuss each item of numerical data given in the exercise with regard to its relevance in making the decision?

Q1B:

Refer to the data given in Q1A. International Chemical Company's special order also requires 1000 kilograms of genatope, a solid chemical regularly used in the company's products.

The current stock of genatope is 8000 kilograms at a carrying amount of $16.20 per kilogram. If the special order is accepted,the firm will be forced to restock genatope earlier than expected, at a predicted cost of $17.40 per kilogram. Without the special order, the purchasing manager predicts that the price will be $16.60 when normal restocking takes place. The order size for genatope is 5000 kilograms.

Required:

1. What is the relevant cost of genatope?

2. Discuss each item of numerical data detailed in this exercise in terms of its relevance to the decision?