Lewis Auto Company manufactures a part for use in its production of automobiles.

Question

Lewis Auto Company manufactures a part for use in its production of automobiles. When 10,000 items are produced, the costs per unit are:

Direct materials                                     $12

Direct manufacturing overhead               $60

Variable manufacturing overhead           $24

Fixed manufacturing overhead               $32

            Total                                         $128

Monty Company has offered to sell Lewis Auto Company 10,000 units of the part for $120 per unit. The plant facilities could be used to manufacture another part at a savings of $180,000 if Lewis auto accepts the supplier’s offer. In addition, $20 per unit of fixed manufacturing overhead on the original part would be eliminated.

Required:

a.         What is the relevant per unit cost for the original part?

b.         Which alternative is best for Lewis auto Company? By how much?

Explanation / Answer

A) Relevant per unit cost

Direct Material. $12

Direct Manufacturing Overhead: $60

Variable Manufacturing Overhead: $24

Avoidable fixed Mfr Overhead:$20

Total:$116

B) Loss on Purchase over Manufacturing $40000

{($120-$116)*10000units}

Savings in manufacturing another part:$180000

Benefit in Purchase:$140000

Thus, Purchasing the 10000 units from Monty Company is beneficial

Amount:$140000

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