Royal Company manufactures 17,000 units of part R-3 each year for use on its pro
ID: 2474256 • Letter: R
Question
Royal Company manufactures 17,000 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 17,000 units of part R-3 each year to Royal Company for $25.20 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 $126,000. However, Royal Company has determined that $10 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?
How much profits will increase or decrease if the outside supplier’s offer is accepted? (Input the amount as a positive value.)
Royal Company manufactures 17,000 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 for making product at 17,000 units:
b) Relavant cost for buying a product at 17,000 units;
Buying cost ( $25.20 x 17,000) = $428,400
Less; Rent revenue from idle facilites = $1,26,000
Relavant cost for buying the product= $302,000
c) Opportunity cost of making is:
Total Relevant cost for making - Relavant cost for buying
= $309,400 - $302,000
=$ 7,400
D) The profits will increase by $7,400
per unit ($) cost at 17,000 units ($) Direct materials 4.10 69,700 Direct labor 6.00 102,000 Variable manufacturing overhead 3.10 52,700 Avoidable fixed cost (15-10) 5.00 85,000 Total Relavant cost 309,400Related Questions
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