5 Royal Company manufactures 20,000 units of part R-3 each year for use on its p
ID: 2453443 • Letter: 5
Question
5
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:
Direct materials
$
4.80
Direct labor
7.00
Variable manufacturing overhead
3.20
Fixed manufacturing overhead
10.00
Total cost per part
$
25.00
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.
Required:
a.
What is the total relevant cost of buying and making the product? (Round "Cost per unit" to 2 decimal places.)
Per Unit
Differential
Costs
20,000 Units
Make**
Buy***
Make**
Buy***
Cost of purchasing
Cost of making:
Direct materials
Direct labor
Variable manufacturing overhead
Fixed manufacturing overhead
Total costs
b.
How much profits will increase or decrease if the outside supplier’s offer is accepted?
Make*****
Buy****
Total cost
Rental value of the space (opportunity cost)
Total cost, including opportunity cost
Net advantage in favor of increase (decrease)
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:
Explanation / Answer
Answer:
The relevant cost is those cost which can be avoided as a result of purchasing from outside.
*The remaining fixed manufacturing cost if $6 ($10-$4) is not relevant because, it would continue to occur regardless of the fact that company makes or buys the product.
b)
The rental value of space used to produce part R-3, amounting to $150,000, represents an opportunity cost of continuing the production internally.
Per Unit Differential costs 20000 units Make Buy Make Buy Cost of purchasing 23.5 470000 Cost of making: Direct Material 4.8 96000 Direct Labor 7 140000 Variable manufacturing overhead 3.2 64000 Fixed Manufacturing overhead * 4 80000 Total Cost 19 23.5 380000 470000Related Questions
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