Every year Kansas Company manufactures 7,900 units of part 231 for use in its pr

Question

Every year Kansas Company manufactures 7,900 units of part 231 for use in its production cycle. The per unit costs of part 231 are as follows:

Verona Company has offered to sell 7,900 units of part 231 to Kansas for $33 per unit. If Kansas accepts Verona’s offer, its freed-up facilities could be used to earn $11,000 in contribution margin by manufacturing part 240. In addition, Kansas would eliminate 40% of the fixed overhead applied to part 231.

(a) Calculate total relevant cost to make and net cost to buy.

Direct materials $ 3 Direct labor 11 Variable manufacturing overhead 6 Fixed manufacturing overhead 10 Total $30

Explanation / Answer

Solution:

Total Relevant cost to make = $(3+11+6)*7900 + (40%of 10)*7900

=1,58,000+31,600

   =1,89,000

Net relevant cost to buy=( 33*7900)-11000

=2,60,700-11000

   =2,49,700

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