Tyler Industries currently manufactures one of its crucial parts at a cost of $4
ID: 2482430 • Letter: T
Question
Tyler Industries currently manufactures one of its crucial parts at a cost of $4.50 per unit. This cost is based on a normal production rate of 50,000 units per year. Direct materials and direct labor costs are $2.50 per unit and incremental overhead costs related to making this part are $50,000 per year. Allocated fixed costs are unavoidable whether the company makes or buys the part. Tyler is considering buying the part from a supplier for a quoted price of $3.70 per unit guaranteed for a three-year period. What is the relevant cost of making the 50,000 units?
Explanation / Answer
Relevant cost of making 50000 units is the cost which can be avoided. So the direct material and labor cost can be avoided so this is relevant cost. Incremental overhead cost is also a relevant cost so should be included. Now the cost which is unavoidable is not considerd relevant because it will be incurred whether it makes or buy the product.
So total relevant cost per unit= $2.5+(50000/50000)=$3.5
Total relevant cost of making 50000 units=3.5*50000=$175000
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