Motor Company manufactures 10,000 units of Part M-l each year for use in its pro

Question

Motor Company manufactures 10,000 units of Part M-l each year for use in its production. The following total costs were reported last year: Direct materials $ 30,000 Direct labor 55,000 Variable manufacturing overhead 45,000 Fixed manufacturing overhead 70,000 Total manufacturing cost $200,000 Valve Company has offered to sell Motor 10,000 units of Part M-l for $18 per unit. If Motor accepts the offer, some of the facilities presently used to manufacture Part M-l could be rented to a third party at an annual rental of $15,000. Additionally, $4 per unit of the fixed overhead applied to Part M-l would be totally eliminated. What is the relevant cost of manufacturing the Part?

Explanation / Answer

Relevant manufacturing cost savings (from part 1) 170000 Annual rental of manufacturing facilities (Savings) 15000 Cost of purchasing the part (18*10000) (180000) Net Advantage of purchasing the part from outside supplier 5000 The offer should be accepted as it offers a net gain of 5000.

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