Equations used required. EXERCISE 1I-9 Make or Buy a Component (LO3) Royal Compa
ID: 2549127 • Letter: E
Question
Equations used required. EXERCISE 1I-9 Make or Buy a Component (LO3) Royal Company manufactures 20.000 units of part R-3 each year for use on its production line. The cost per unit for part R-3 follows: $4.80 7.00 Direct materials. .. . Variable manufacturing overhead Fixed manufacturing overhead . . 10.00 Total cost per part ..............$25.00 An outside supplier has offered to sell 20,000 units of part R-3 each year to Royal Company for $23.50 per part. If Royal Company accepts this offer, the facilities now being used to manufacture part R-3 could be rented $150,000. However, Royal Company has determined that to another company at an annual rental of S6 of the fixed manufacturing overhead being applied to part R-3 would continue even if part R 3 were purchased from the outside supplier Required: Prepare e computations to show the net dollar advantage or disadvantage of accepting the outside supplier's offer.Explanation / Answer
Total relevant cost of making the product = {[$4.80 + $7.00 + $3.20 + ($10.00 - $6.00)] × 20,000} + $150,000 = $530,000
Total relevant cost of buying this product = $23.50 × 20,000 = $470,000
Net advantage in favor of buying = $530,000 - $470,000 = $60,000
Profits would increase by $60,000 if the outside supplier’s offer is accepted.
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