Question

Bosques Corporation has in stock 35,800 kilograms of material L that it bought fiveyears ago for $5.55 per kilogram. This raw material was purchased to use in a productline that has been discontinued. Material L can be sold as is for scrap for $1.67 perkilogram. An alternative would be to use material L in one of the company's currentproducts, Q08C, which currently requires 2 kilograms of a raw material that isavailable for $9.15 per kilogram. Material L can be modified at a cost of $0.78 perkilogram so that it can be used as a substitute for this material in the production ofproduct Q08C. However, after modification, 4 kilograms of material L is required forevery unit of product Q08C that is produced. Bosques Corporation has now received arequest from a company that could use material L in its production process. Assumingthat Bosques Corporation could use all of its stock of material L to make productQ08C or the company could sell all of its stock of the material at the current scrapprice of $1.67 per kilogram, what is the minimum acceptable selling price of materialL to the company that could use material L in its own production process

Answer 1

Answer:

material L should be sold for at least $3.80 per kg

Explanation:

alternative 1, sell material L at scrap value:

35,800 kg x $1.67 = $59,786

alternative 2, process material L and use it to produce Q08C:

processing costs = 35,800 x $0.78 = $27,924

modified L will replace 17,900 of another material that is worth 17,900 x $9.15 = $163,785

net additional income = $163,785 - $27,924 = $135,861

alternative 2 generates the highest additional income = $135,861 / 35,800 = $3.795 per kg.

the minimum acceptable price ≥ to the additional revenue generated by alternative 2, therefore, material L should be sold for at least $3.80 per kg