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Relevant cost of materials

Roddey Corporation is a specialty component manufacturer with idle capacity. Management would like to use its extra capacity to generate additional profits. A potential customer has offered to buy 2,900 units of component GEE. Each unit of GEE requires 3 units of material R39 and 8 units of material I59. Data concerning these two materials follow:

material units original cost current market disposal value per
in stock per unit price per unit unit

R39 340 $4.70 $4.35 $3.95
I59 23,700 $8.20 $8.05 $6.85

Material R39 is in use in many of the company's products and is routinely replenished. Material I59 is no longer used by the company in any of its normal products and existing stocks would not be replenished once they are used up.
What would be the relevant cost of the materials, in total, for purposes of determining a minimum acceptable price for the order for product GEE?

Solution Preview

The relevant cost would be the incremental cost and the opportunity cost
Material R39 is used in many products and is routinely replenished. Thus if this material is used in GEE, then some more will have ...

Solution Summary

The solution explains how to determine the relevant cost of materials.