Janeiro Skate, Inc. currently manufactures the wheels that it uses for its in-li
ID: 2371374 • Letter: J
Question
Janeiro Skate, Inc. currently manufactures the wheels that it uses for its in-line skates. The annual costs to manufacture the 150,000 wheels needed each year are as follows:
Total Cost
Direct material $ 165,000
Direct labor 45,000
Variable overhead 60,000
Fixed overhead 300,000
Total $ 570,000
Kasba Rubber Company has offered to provide Janeiro with all of its annual wheel needs for $3.50 per wheel. If Janeiro accepts this offer, 75% of the fixed overhead above could be totally eliminated. Also, Janeiro would be able to rent out the freed up space and could generate $72,000 of income annually.
Here are my calculations.....
Is this a wise deal for Janeiro to take? I don't see them saving any money per unit or in production. But they are gaining $69k.
Explanation / Answer
Relevant Manufacturing Cost
Direct material $ 165,000.00
Direct labor $ 45,000.00
Variable overhead $ 60,000.00
Variable Cost $ 270,000.00
Fixed overhead (75%) $ 225,000.00
Total Relevant Manufaturing Cost $ 495,000.00
Per unit Relevant Manufaturing cost $ 3.30 Per unit
Relevant Purchase Price
purchase price $ 3.50
Rent revenue $ 72,000.00
Rent Revenue per unit = 0.48
Relevant Purchase Price per unit = $3.02
Saving per unit $ 0.28
Total savings in purchase = 0.28*150000 = $42,000.00
It would be better to purchase , so the deal is wise for Janeiro to take which will save $42,000
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