Chapter 7 Harwood Aviation produces an executive jet for which it currently manu

Question

Chapter 7 Harwood Aviation produces an executive jet for which it currently manufactures a flaperon control lever. The budgeted cost of each lever for the upcoming year is indicated below: Variable costs Direct material Direct labor Variable overhead Total variable costs 325.00 $ 200.00 150.00 675.00 Fixed costs epreciation of equipment Depreciation of building Supervisory salaries Total fixed costs 60.00 80.00 140.00 280.00 S 955.00 otal cost The company has an offer from Lars Levers Inc. to produce the required parts for $700 each. Lars is able to supple the 400 levers needed in the coming year. If Harwood outsources the lever production to Lars, supervisors from the production units will be reassigned to other areas needing their services (Harwood would not hire additional supervisors if these supervisors were not available). The equipment cannot be used elsewhere in the company, and it has no resale value. However, the space occupied by the production of the levers can be used by another production group that is currently leasing space for $25,000 per year. based on the For each of the costs listed below indicate whether the cost is Relevant or Irelevant to Harwood's decision statement of the problem. Use a 1 to indicate a Relevant cost and a 2 to indicate an Irrelevant cost. Direct material Direct labor Variable overhead Depreciation of equipment Depreciation of building Supervisory salaries Purchase price of levers Space rental price Indicate the net benefit or (cost) of buying the 400 levers from Lars Levers. A benefit is a positive number and a net cost is a negative number In House Lars

Explanation / Answer

Which cost is Relevant or irrelvant to Harwood's decision Particulars Relevant (1)/ Irrelvant (2) Direct Material 1 Direct Labor 1 Variable overhead 1 Depreciation of equipment 2 Depreciation of building 2 Supervisory salaries 2 Purchase price of levers 1 Space rental price 1 Particulars Produce Buy Incremental Increase/(Decrease) Purchase Price 700 700 Direct Material 325 325 Direct Labor 200 200 Variable overhead 150 150 Total Relevant Cost 675 700 -25 Opportunity cost* 62.5 62.5 Total Cost 737.5 700 37.5 *In this case, the space occupied by the production of the levers can be used by another production group. The $25,000 additional operating income is considered as opportunity cost and therefore, added in the total cost computation of "Produce" category. Conclusion There is incremental cost of $37.5 to produce the lever after considering opportunity cost.

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