Leland Manufacturing uses 10 units of Part Number KJ37 each month in the product

Question

Leland Manufacturing uses 10 units of Part Number KJ37 each month in the production of radar equipment. The unit cost to manufacture 1 unit of KJ37 is presented below. Direct materials Materials handling (20% of direct materials cost) Direct labor Manufacturing overhead (150% of direct labor) Total manufacturing cost $1,000 200 8,000 12,000 $21,200 Materials handling represents the direct variable costs of the Receiving Department that are applied to direct materials and purchased components on the basis of their cost. This is a separate charge in addition to manufacturing overhead. Leland's vendors, has offered to supply Part Number KJ37 at a unit price of $15,000 Assume that Leland Manufacturing does not wish to commit to a rental agreement but could use idle capacity to manufacture control, Leland's opportunity cost is annual manufacturing overhead budget is one-third variable and two-thirds fixed. Scott Supply, one of Leland's reliable that would contribute $52,000 per month. If Leland elects to manufacture KJ37 in order to maintain quality A. B. C. Some amount other than those given $4,000 S(20,000) D. $18,000

Explanation / Answer

Answer. A. Some amount other than those given. Explanation Differential cost of 10 units Make Buy Differential Direct material 10000 0 10000 material handling cost 2000 0 2000 Direct labour 80000 0 80000 Manufacturing OH 120000 80000 40000 Cost of buying from Vendor 0 150000 -150000 Contribution margin from New product 0 -52000 52000 Total cost 212000 178000 34000 Therefore, Net incremental income from buying 10 units is $34000 Which has been foregone by company. hence, the Opportunity cost is $34000

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