Royal Company manufactures 29,000 units of part R-3 each year for use on its pro

Question

Royal Company manufactures 29,000 units of part R-3 each year for use on its production line. At this level of activity, the cost per unit for part R-3 is:

    

An outside supplier has offered to sell 29,000 units of part R-3 each year to Royal Company for $47.50 per part. If Royal Company accepts this offer, the facilities now being used to manufacture part R-3 could be rented to another company at an annual rental of $837,100. However, Royal Company has determined that $8 of the fixed manufacturing overhead being applied to part R-3 would continue even if part R-3 were purchased from the outside supplier.

What is the total relevant cost of making the product? (Omit the "$" sign in your response.)

     

   

     

   

    

    

How much profits will increase or decrease if the outside supplier’s offer is accepted? (Input the amount as a positive value. Omit the "$" sign in your response.)

Royal Company manufactures 29,000 units of part R-3 each year for use on its production line. At this level of activity, the cost per unit for part R-3 is:

Explanation / Answer

a. Relevant cost of making the product

b. Relevant Cost of buying the product

c. Opportunity cost of making is the rent income i.e. $837100

d. If supplier's offer is accepted profis would decrease by $772400 - $423400 = $349000

Particulars Amount Direct material 3.9 Direct Labor 7 Variable overhead 3.70 Total relevant cost of one unit 14.60 No. of units to be produced 29000 Total relevant cost 423400

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