One of my players asked about using the metal from the green meteoric iron sword they sold in town to get a knife made.
In other words, could the swordsmith they presumably sold it to (his supposition - likely it was some trader) use the metal from it to craft a knife?
Yes, and no.
Yes, having a weapon they found melted down, and the metal used for a specific new purpose, is fine. It's not necessarily cheaper - it probably is not, once you factor in all the costs of a custom job where you specify both additional work (melt a weapon down, and use only that material for a new one.) You'd have to sell the remaining metal as scrap metal, or just pay to have it melted down and used. Some players will balk at the extra, but remember you're dealing with guild experts, and telling them how you want their job done is likely to cost extra.
No, you can't sell a weapon for its value as a complete, useable item, and then use the material from it for a custom job. The sale price assumes someone bought it intended it for resale (merchant buys at 40%, sell at 100% to a final buyer). You cannot realize the value of the item for its resale value, and get access to the components of that item as scrap.
Basically you can't realize the value of something as loot and get utility out of it as well. You can decide to keep something, not realize its value as loot, and then get some use out of it as another thing. You either decide to keep it and/or get it changed/modified/used/etc. in town, or you sell it on the spot and get it counted as loot. No double-dipping!