Exercise 8-10 Every year Pina Industries manufactures 5,900 units of part 231 fo

Question

Exercise 8-10

Every year Pina Industries manufactures 5,900 units of part 231 for use in its production cycle. The per unit costs of part 231 are as follows:

Flintrock, Inc., has offered to sell 5,900 units of part 231 to Pina for $33 per unit. If Pina accepts Flintrock’s offer, its freed-up facilities could be used to earn $11,300 in contribution margin by manufacturing part 240. In addition, Pina would eliminate 50% of the fixed overhead applied to part 231.

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

(b) Should Pina accept Flintrock’s offer?

Direct materials $ 3 Direct labor 10 Variable manufacturing overhead 6 Fixed manufacturing overhead 10 Total $29

Explanation / Answer

(a)

Total relavent cost to make = Direct Materials + Direct labour + Variable manufacturing overhead + Contribution margin lost + Avoidable fixed overhead

= (3*5,900) + (10*5,900) + (6*5,900) + 11,300 + (5*5,900)

= 17,700 + 59,000 + 35,400 + 11,300 + 29,500

= 152,900

Net relavnet cost to buy = 5,900 units * 33 per unit = 194,700

(b)

Should Pina accept Flintrock’s offer?

No (as the relavent cost to buy is more).

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