irkland Company manufactures a part for use in its production of hats. When 10,0
ID: 2479156 • Letter: I
Question
irkland Company manufactures a part for use in its production of hats. When 10,000 items are produced, the costs per unit are:
Direct materials $0.60
Direct manufacturing labor 3.00
Variable manufacturing overhead 1.20
Fixed manufacturing overhead 1.60
Total $6.40
Mike Company has offered to sell to Kirkland Company 10,000 units of the part for $6.00 per unit. The plant facilities could be used to manufacture another item at a savings of $9,000 if Kirkland accepts the offer. In addition, $1.00 per unit of fixed manufacturing overhead on the original item would be eliminated. (HINT: $.60 will NOT differ between these two alternatives.)
What is the relevant per unit cost for the original part?
Explanation / Answer
Statement showing computations Particulars Make Buy Difference Direct Materials cost = 10,000*.60 6,000.00 6,000.00 Direct Manu Labour cost = 10,000*3 30,000.00 30,000.00 Variable Manu O/H cost = 10,000*1.20 12,000.00 12,000.00 Relevant fixed Manu O/H Cost = 10,000*1 10,000.00 10,000.00 Costs of Purchasing = 10,000*6 60,000.00 (60,000.00) Benefit from using plant facilities (9,000.00) 9,000.00 Total relevant costs 58,000.00 51,000.00 7,000.00 No of units 10,000.00 10,000.00 Relevant Per unit Costs 5.80 5.10
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