Royal Company manufactures 19,000 units of part R-3 each year for use on its pro
ID: 2418051 • Letter: R
Question
Royal Company manufactures 19,000 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 19,000 units of part R-3 each year to Royal Company for $51.00 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 $582,500. However, Royal Company has determined that $10 of the fixed manufacturing overhead being applied to part R-3 would continue even if part R-3 were purchased from the outside supplier. What is the total relevant cost of making the product? (Omit the "$" sign in your response.) What is the total relevant cost of buying the product? (Omit the "$" sign in your response.) What is the opportunity cost of making instead of buying? (Omit the "$" sign in your response.) How much profits will increase or decrease if the outside supplier's offer is accepted? (Input the amount as a positive value. Omit the "$" sign in your response.)Explanation / Answer
a) Relevant cost of making the product = direct materials + direct labour + variable manufacturing overhead + avoidable fixed cost = $4.10 + $8 + $3.40 + $ (15-10) = $20.50 per unit
Total relevant cost for making 19000 units = 19000 x $20.50 = $389500
b) Relevant cost of buying the product
= Purchase price - savings in fixed cost - additional income from renting the excess capacity
= $51 x 19000 - $582500 - $5 x 19000
= $291500
c) Opportunity cost of making
= loss of additional revenue + savings in fixed cost
= $582500 + $5 x19000
= $677500
d) Profit will increase by $389500 - $291500 = $98000
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.