Reference no: EM132556849

Rangitikei Ltd has received an order for a product it does not normally manufacture. The company does have spare capacity and is considering accepting the order. In analysing the decision, the following data has been compiled:

1. 1 000 kg of chemical Y is required for completing the order, which is regularly used by the company in its production.
2. The current stock of chemical Y is 8 000 kg at a carrying amount of $16.20 per kilogram.
3. If the order is accepted, the company will have to order more of chemical Y earlier than expected, at a predicted price of $17.40 per kilogram.
4. Without the special order, the purchasing manager predicts that the price will be $16.60 when normal restocking takes place.
5. The order size for chemical Y is 5 000 kg.

Required: Show all your workings.

Question i. If the order is accepted, what will the relevant cost of chemical Y be?

Question ii. Discuss each of the following items in terms of their relevance to the decision:

a) Current stock of chemical Y of 8 000 kg at $16.20 per kg.

b) 1 000 kg of chemical Y used for the special order.

c) Cost per kg ($17.40) of chemical Y if order is placed earlier.

d) Cost per kg ($16.60) of chemical Y if order is placed at normal re-order time.