Ergo Products manufactures a variety of ergonomic household tools including a co

Question

Ergo Products manufactures a variety of ergonomic household tools including a cordless drill. The cordless drill comes with a battery recharger. Currently, the company manufactures its own recharger for the drill with the following unit costs when 5,000 rechargers are produced each year:

Direct materials

$3.00 per unit

Direct labor

$3.00 per unit

Variable overhead

$1.00 per unit

Fixed overhead

$2.00 per unit

Another manufacturer has offered to supply Ergo with a recharger for a cost of $8 each. Ergo has determined that if they accept the offer, 80% of the fixed overhead allocated to the rechargers will be avoidable.

Question: By what amount will the company

Explanation / Answer

Current cost of 5000 rechargers =(3+3+1+2)*5000 = $45000

New cost of 5000 chargers = 8*5000 + 2*5000*(1-80%) =$42000

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