O'Reilly Co has been approached by a customer who would like a special job to be done for him, and who is willing to pay $22,000 for it. The job would require the following materials:
|
|
Total units
|
Units already in
|
Book value of
|
Realisable
|
Replacement
|
|
Material
|
required
|
inventory
|
units in inventory
|
value
|
cost
|
|
|
|
|
$/unit
|
$/unit
|
$/unit
|
|
A
|
1,000
|
0
|
-
|
-
|
6
|
|
B
|
1,000
|
600
|
2
|
2.5
|
5
|
|
C
|
1,000
|
700
|
3
|
2.5
|
4
|
|
D
|
200
|
200
|
4
|
6.0
|
9
|
(a) Material B is used regularly by O'Reilly Ltd, and if units of B are required for this job, they would need to be replaced to meet other production demand.
(b) Materials C and D are in inventory as the result of previous over-buying, and they have a restricted use. No other use could be found for material C, but the units of material D could be used in another job as substitute for 300 units of material E, which currently costs $5 per unit (of which the company has no units in inventory at the moment).
What are the relevant costs of material, in deciding whether or not to accept the contract?