Royal Company manufactures 20,000 units of part R-3 each year for use on its pro
ID: 2374484 • Letter: R
Question
Royal Company manufactures 20,000 units of part R-3 each year for use on its production line. At this level of activity, the cost per unit for part R-3 is:
An outside supplier has offered to sell 20,000 units of part R-3 each year to Royal Company for $23.50 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 $150,000. However, Royal Company has determined that $6 of the fixed manufacturing overhead being applied to part R-3 would continue even if part R-3 were purchased from the outside supplier.
What is the total relevant cost of making the product? (Omit the "$" sign in your response.)
What is the total relevant cost of buying the product? (Omit the "$" sign in your response.)
Direct materials $ 4.80 Direct labor 7.00 Variable manufacturing overhead 3.20 Fixed manufacturing overhead 10.00 Total cost per part $ 25.00Explanation / Answer
Total relevant cost of making the product:
$4.80 + $7.00 + $3.20 + ($10.00 - $6.00) = $19.00 * 20,000 = $380,000 + $150,000 = $530,000
Total relevant cost of buying this product:
$23.50 * 20,000 = $470,000
Total opportunity cost:
$150,000
How much profits will increase or decrease if the outside supplier's offer is accepted:
$530,000 - $470,000 = $60,000 (increase)
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