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Relevant Cost Decision Making

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Use the following to answer questions 11-12:
11. Rams Company needs 20,000 units of a certain part to use in its production cycle. If Rams buys the part from Steelers Company instead of making it, Rams cannot use the excess capacity for another manufacturing activity. Forty percent of the fixed overhead will continue regardless of what decision is made.
Cost to Rams to make the part: (per unit)
Direct Materials $12
Direct Labor $26
Fixed Overhead $10

Cost to buy the part from Steelers Company - $42 per unit. In deciding whether to make or buy the part, Rams' total relevant costs to make the part are:

a $760,000
b $840,000
c $880,000
d $960,000

12. Based on data from question 11:
What decision should Rams make, and what is the total cost advantage that would result?

a Make, $40,000
b Make, $120,000
c Buy, $80,000
d Buy, $40,000

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Solution Summary

The solution uses relevant cost for decision making purpose whether make or buy and the total cost advantage.

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Relevant Cost = DM + DL + Variable Fixed Overhead

As 40% FO are fixed, then ...

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