Lewis Auto Company manufactures a part for use in its production of automobiles.

Question

Lewis Auto Company manufactures a part for use in its production of automobiles. When 10,000 items are produced, the costs per unit are: Direct materials $ 12 Direct manufacturing labor 60 Variable manufacturing overhead 24 Fixed manufacturing overhead 32 Total $128 Monty Company has offered to sell Lewis Auto Company 10,000 units of the part for $120 per unit. The plant facilities could be used to manufacture another part at a savings of $180,000 if Lewis Auto accepts the supplier's offer. In addition, $20 per unit of fixed manufacturing overhead on the original part would be eliminated. a. What is the relevant per unit cost for the original part? b. Which alternative is best for Lewis Auto Company? By how much?

Explanation / Answer

Relevant cost = Direct Material + direct manufacturing + Variable manufacturing overhead + Relevant fixed cost = 12 + 60 + 24 + 20 = 116 Cost if the part is bought Purchase price 10000 * 120 1200000 Add: Unavoidable fixed cost 10000 * (32

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