Evaluating the Relevant Cost
Not what you're looking for?
Question: Ahron Company makes 76,000 units per year of a part it uses in the products it manufactures. The unit product cost of this part is computed as follows:
Direct materials: $14.2
Direct labor: 16.8
Variable manufacturing overhead: 1.5
Fixed manufacturing overhead: 20.7
Unit product cost: $53.2
An outside supplier has offered to sell the company all of these parts it needs for $47.2 a unit. If the company accepts this offer, the facilities now being used to make the part could be used to make more units of a product that is in high demand. The additional contribution margin on this other product would be $553,000 per year.
If the part were purchased from the outside supplier, all of the direct labor cost of the part would be avoided. However, $13.5 of the fixed manufacturing overhead cost being applied to the part would continue even if the part were purchased from the outside supplier. This fixed manufacturing overhead cost would be applied to the company's remaining products.
How much of the unit product cost of $53.2 is relevant in the decision of whether to make or buy the part?
- $16.8
- $39.7
- $32.5
- $53.2
Purchase this Solution
Solution Summary
This solution provides a very brief, but concise response which explains how to determine the avoidable cost. The required calculation is provided in the solution.
Purchase this Solution
Free BrainMass Quizzes
Balance Sheet
The Fundamental Classified Balance Sheet. What to know to make it easy.
Situational Leadership
This quiz will help you better understand Situational Leadership and its theories.
Cost Concepts: Analyzing Costs in Managerial Accounting
This quiz gives students the opportunity to assess their knowledge of cost concepts used in managerial accounting such as opportunity costs, marginal costs, relevant costs and the benefits and relationships that derive from them.
MS Word 2010-Tricky Features
These questions are based on features of the previous word versions that were easy to figure out, but now seem more hidden to me.
Team Development Strategies
This quiz will assess your knowledge of team-building processes, learning styles, and leadership methods. Team development is essential to creating and maintaining high performing teams.