Jones, Inc. makes 10,000 units per year of a part called a prositron for use in
ID: 2425885 • Letter: J
Question
Jones, Inc. makes 10,000 units per year of a part called a prositron for use in one of its products. Data concerning the unit production costs of the prositron follow. Direct materials $250 Direct labor 125 Variable manufacturing OH 50 Fixed manufacturing OH 150 Total $575 An outside supplier has offered to sell Hanson, Inc. all of the prositrons it requires. If Hanson, Inc. decided to discontinue making the prositrons, 20% of the above fixed manufacturing overhead costs could be avoided. Required: Assume Hanson, Inc. has no alternative use for the facilities presently devoted to production of the prositrons. If the outside supplier offers to sell the prositrons for $425 each, should Hanson, Inc. accept the offer? Fully support your answer with appropriate calculations
Explanation / Answer
Solution:
Relevant cost of making
Direct materials $250
Direct labor 125
Variable manufacturing OH 50
Fixed manufacturing OH 30
Total $455
(For Fixed Manufacutring OH only 10% of the current cost is a relevant cost since that could be saved by discontinuing production)
Since the relevant cost of making is less than the offer made by the outside supplier. Hanson should not accept the offer.
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