Kingston Inc. needs 10,000 units of an electronic part to be used in production.
ID: 2447672 • Letter: K
Question
Kingston Inc. needs 10,000 units of an electronic part to be used in production. If the company buys the part from Burlington Company instead of making it, Kingston could not use the present facilities for another manufacturing activity. The purchase price of the part is $53 per unit. Sixty percent (60%) of the fixed overhead applied will continue regardless of what decision is made. The following quantitative information is available regarding the unit cost to Kingston lo make the part: Please answer the following questions. Justify your answers with computations. 1. In deciding whether to make or buy the part, what is Kingston?s total relevant cost to make the part? 2. What alternative is more desirable for Kingston and by what amount? 3. If Kingston needs 5,000 units of the part, how will your answers in 1 and 2 be different? Why?Explanation / Answer
For make or buy decisions, what is relevant is the variable costs as the fixed costs will continue to be incurred irrespective of the decision
1) Relevant costs are the variable costs
Direct material - $7
Direct Labor - $24
Variable Overhead - $12
Fixed overhead (40%) - $6
Total relevant costs - $49
Buy Cost - $53
2) It is beneficial to make the component in Kingston Inc as the cost of making is only $49 which is $4 better than buying from Burlington
3) It will not make a difference with 5,000 units as the capacity of Kingston Inc cannot be used elsewhere. It is better to make the units in Kingston only as the relevants costs are still beneficial to make in house.
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