Question

Milford Corporation has in stock 16,100 kilograms of material R that it bought five years ago for $5.75 per kilogram. This raw material was purchased to use in a product line that has been discontinued. Material R can be sold as is for scrap for $3.91 per kilogram. An alternative would be to use material R in one of the company's current products, S88Y, which currently requires 2 kilograms of a raw material that is available for $7.60 per kilogram. Material R can be modified at a cost of $0.77 per kilogram so that it can be used as a substitute for this material in the production of product S88Y. However, after modification, 4 kilograms of material R is required for every unit of product S88Y that is produced. Milford Corporation has now received a request from a company that could use material R in its production process. Assuming that Milford Corporation could use all of its stock of material R to make product S88Y or the company could sell all of its stock of the material at the current scrap price of $3.91 per kilogram, what is the minimum acceptable selling price of material R to the company that could use material R in its own production process?

Answer 1

Answer:

Therefore the company should sell material R for $3.91 per kilogram.

Explanation:

Product S88Y:

Current cost (2 kg × $7.60)

=$15.20

Thus If material R were to be used, that means 4 kilograms would be needed.

Hence It currently costs $15.20 for Product S88Y to maintain this same cost.

Therefore material R would be:

[($15.20 ÷ 4 kg) − $0.77]

=3.8kg-$0.77

=$3.03 per kg

Therefore the company should go ahead and sell material R for $3.91 per kilogram.