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Accounting: Relevant costs.

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A company 'A' needs 10,000 units of a certain part to use in its production cycle. If the company buys the part from another company 'B', company 'A' cannot use the excess capacity for another manufacturing activity. Forty percent of the overhead will continue regardless of what decision is made. Cost for company 'A' to make the part per unit:

Direct materials: $20
Direct labor: 32
Fixed Overhead: 15
Cost to buy the part from company 'B': $65 per unit

1. In deciding whether to make the part, what is company 'A''s total relevant costs to make the part?
2. What decision should company 'A' make? and what is the total cost advantage?
3. What is the total dollar value of costs that are not relevant to this decision?

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Solution Summary

The problem deals with determining the relevant costs for different situations.

Solution provided by:
Chidi Ngene, M. Sc.
Education
  • B. Sc., University of Nigeria
  • M. Sc., London South Bank University
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