Intercontinental Chemical Company, located in Buenos Aires, Argentina, recently received an order for a product it does not normally produce. Since the company has excess production capacity, management is considering accepting the order. In analyzing the decision, the assistant controller is compiling the relevant costs of producing the order. Production of the special order would require 8,000 kilograms of theolite. Intercontinental does not use theolite for its regular product, but the firm has 8,000 kilograms of the chemical on hand from the days when it used theolite regularly. The theolite could be sold to a chemical wholesaler for 14,500 p. The book value of the theolite is 2.00 p per kilogram. Intercontinental could buy theolite for 2.40 p per kilogram. (p denotes the peso, Argentina’s national monetary unit, Many countries use the peso as their unit of currency. On the day this exercise was written, Argentina’s peso was worth .3274 U.S. dollar.)
Required:
1. What is the relevant cost of theolite for the purpose of analyzing the special-order decision?
2. Discuss each of the numbers given in the exercise with regard to its relevance in making the decision.