Name on Request Company produces a single product called Thing. The company norm
ID: 2462382 • Letter: N
Question
Name on Request Company produces a single product called Thing. The company normally produces and sells 50,000 Things each year at a selling price of $50 per unit, The company's unit costs and total costs at this level is given below:
Direct Materials
Unit Cost
$15
Total Cost
$750,000
Direct Labor
8
400,000
Variable Manufacturing Overhead
3
150,000
Fixed Manufacturing Overhead
9
450,000
Variable Selling Expenses
4
200,000
Fixed Selling Expenses
6
300,000
Cost per Unit and Total Cost
$45
$2,250,000
Answer the SIX questions below relating to the production and sale of Things. NOTE: Each question is INDEPENDENT.
6. An outside manufacturer has offered to produce Things and ship them directly to Name on Request Company's customers. If Name on Request accepts this offer, the plant that it uses to produce Things would be idle. However, fixed manufacturing overhead costs would be reduced by 75 %. Because the outside manufacturer would pay for all shipping costs, variable selling expenses would be only $1 per Thing. Compute the unit cost that is relevant for comparison to the price quoted by the outside manufacturer. (Show your calculation),
Direct Materials
Unit Cost
$15
Total Cost
$750,000
Direct Labor
8
400,000
Variable Manufacturing Overhead
3
150,000
Fixed Manufacturing Overhead
9
450,000
Variable Selling Expenses
4
200,000
Fixed Selling Expenses
6
300,000
Cost per Unit and Total Cost
$45
$2,250,000
Explanation / Answer
Relevant costs are costs which are incurred by the company if the manufacture of a product takes place. In the above question, 75% of the fixed manufacturing overhead will get reduced if the product is not manufactured. So, 75% is the cost which is incurred if the product is manufactured and 25% is non relevant. Also, selling overhead has to be incurred if the product is sold and there will be no change in selling overheads, nut fixed portion of selling overheads are not sunk costs as they are incurred if product is manufactured and sold. If the product is not manufactured, there is no need of Salesperson or sales advertisements which form part of selling overheads.
So, unit cost for comparison is $42.75 per unit.
Particulars Unit Cost Total Cost Direct materials 15.00 750000 Direct labor 8.00 400000 Variable manufacturing overhead 3.00 150000 Fixed Mfg overhead (75%) 6.75 337500 Variable selling expenses 4.00 200000 Fixed Selling expenses 6.00 300000 Relevant costs 42.75 2137500.00Related Questions
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