The Outland Company manufactures 1,000 units of a part that could be purchased f

Question

The Outland Company manufactures 1,000 units of a part that could be purchased from an outside supplier for $12 each. Outland's costs to manufacture each part are as follows: Direct materials Direct labor Variable manufacturing overhead 4 Fixed manufacturing overhead $2 Total $17 All fixed overhead is unavoidable and is allocated based on direct labor. The facilities that are used to manufacture the part have no alternative uses. (a) Calculate relevant cost to make Relevent cost to make s per unit (b) Should Outland continue to manufacture the part? (c) Calculate net cost to buy if Outland leases the manufacturing facilities to another company for $5,000 per year. Net cost to buy s (d) Would vour answer chanae if Outland could lease the manufacturina facilities to another companv for $5.000 per vear

Explanation / Answer

Req a: Relevant cost to make the part: Direct material 2 Direct labour 3 variable manufacturing OH 4 Relevant cost to make the part: 9 Relevant cost to make is $ 9 per unit Note: Fixed cost is not a relevant cost as it does not change with the decision. Req b: YES, the company should continue to manufacture the product. Req c: Net cost of buying 1000 units: Supplier cost of 1000 units @ 12 each (1000*12) 12000 Less: lease rentals earned: 5000 Net cost of buying 1000 units: 7000 Req c: Yes, the company now should buy the units from supplier.

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