Thompson Company currently produces 10,000 units of a key part at a total cost o

Question

Thompson Company currently produces 10,000 units of a key part at a total cost of $512,000 annually. Annual variable costs are $300,000. Of the annual fixed costs, $140,000 relate specifically to this part. The remaining fixed costs are unavoidable. Another manufacturer has offered to supply the part for $48 per unit. The facilities currently used to manufacture the part could be used to manufacture a new product with an expected contribution margin of $60,000 annually. Alternatively, the facilities could be rented out at $70,000 annually. If Thompson Company makes the part, what is the annual opportunity cost of the facilities? SHOW WORK

Explanation / Answer

Calculation of the Annual Opportunity Cost Units 10000 variable Cost 300000 Avoidable Fixed cost 140000 Unavoidable Fixed Cost 512000-300000-140000 72000 Total Cost 512000 Cost of Another Manufacturer Cost 10000*48 480000 Unavoidable Fixed Cost 72000 Less:- Higher of benefits 60000 or 70000 -70000 Total cost 482000 The opportunity cost will be 512000-482000 $30,000 i.e. the loss if manufacturing of the product is chosen

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