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

Question

Dolphin Company currently produces 10,000 units of a key part at a total cost of $512,000 annually. Variable costs are $300,000 annually. 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 $30,000 per year. Alternatively, the facilities could be rented out at $60,000 per year. Given all of these alternatives, what is Dolphin Company's lowest net relevant cost for the parts? SHOW WORK

Explanation / Answer

Relevant cost

Fixed costs are sunk cost hence not relevant

Original ALT 1 ALT2 Variable cost @30,48,48 300,000 480,000 480,000 Contribution / rent (30,000) (60,000) Relevant cost 300,000 450,000 420,000

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