Royal Company manufactures 17,000 units of part R-3 each year for use on its pro
ID: 2483502 • Letter: R
Question
Royal Company manufactures 17,000 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:
An outside supplier has offered to sell 17,000 units of part R-3 each year to Royal Company for $25.20 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 $126,000. However, Royal Company has determined that $10 of the fixed manufacturing overhead being applied to part R-3 would continue even if part R-3 were purchased from the outside supplier.
What is the total relevant cost of making the product?
How much profits will increase or decrease if the outside supplier’s offer is accepted? (Input the amount as a positive value.)
Royal Company manufactures 17,000 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
a)
Total relevant cost of making the product
= Direct materials cost + direct labour cost + variable manufacturing cost + avoidable fixed cost + opportunity cost of rent foregone
= $(4.10+6+3.10) / unit x 17000 units + $(15-10) per unit x 17000 + $126000
= $435400
b)
Total relevant cost of buying the product
= Purchase price of 17000 units
= $25.20 /unit x 17000units = $ 428400
c)
Opprtunity cost = loss of contribution from rent = $126000
d)
The profit Will increase by $7000 because relevant cost of buying the product is less than the relavant cost of making the product.
$435400 - $428400 = $7000
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