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Relevant Cost Decisions

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The Reno Company manufactures Part No. 498 for use in its production line. The manufacturing cost per unit for 20,000 units of Part No. 408 is as follows:

Direct material___________________________________$6__
Direct manufacturing labor________________________30__
Variable manufacturing overhead___________________12__
Fixed manufacturing overhead allocated____________16__
Total manufacturing cost per unit________________$64__

The Tray Company has offered to sell 20,000 units of Part No. 498 to Reno for $60 per unit. Reno will make the decision to buy the part from Tray if there is an overall savings of at least $25,000 for Reno. If Reno accepts Tray's offer, $9 per unit of the fixed overhead allocated would be eliminated. Furthermore, Reno has determined that the released facilities could be used to save relevant costs in the manufacture of Part No. 575. For Reno to achieve an overall savings of $25,000, the amount of relevant costs that . would have to be saved by using the released facilities in the manufacture of Part No. 575 would be:

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If they manufacture : total cost = 64*20,000 = 1280000
<br>If they don't manufacture : total cost = 60*20,000 + ...

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  • BE, Bangalore University, India
  • MS, University of Wisconsin-Madison
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