Direct materials $ 5.10 Direct labor 7.00 Variable manufacturing overhead 3.50 F

Question

Direct materials $ 5.10 Direct labor 7.00 Variable manufacturing overhead 3.50 Fixed manufacturing overhead 9.00 Total cost per part $ 24.60 An outside supplier has offered to sell 19,000 units of part R-3 each year to Royal Company for $22.60 per part. If Royal Company accepts this offer, the facilities now being used to manufacture part R-3 could be rented to another company at an annual rental of $73,000. However, Royal Company has determined that $6 of the fixed manufacturing overhead being applied to part R-3 would continue even if part R-3 were purchased from the outside supplier. Required: a. What is the total relevant cost of making the product? Total relevant cost of making the product (19,000 units) $ b. What is the total relevant cost of buying the product? Total relevant cost of buying the product (19,000 units) $ c. What is the opportunity cost of making instead of buying? Total opportunity cost $

Explanation / Answer

(a) Relevant cost of making the product: D.material=5.10 D.labour=7.00 V.OH=3.50 Avoidable F.OH=3.00 Total relevant cost = 18.60*19000 = 353400 (b) Relevant cost of purchasing: Purchase cost = 22.60*19000 = 429400 Less: Rental Income = 73000 Total Relevant cost = 356400 (c) Opportunity Cost of making over buying = 353400-356400 = (3000) Please rate the answer as lifesaver.Thank u in advance.God bless:)

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