Exercise 8-10 Every year Sheffield Industries manufactures 7,200 units of part 2

Question

Exercise 8-10 Every year Sheffield Industries manufactures 7,200 units of part 231 for use in its production cycle. The per unit costs of part 231 are as follows: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Tota $ 5 10 7 10 $32 Flintrock, Inc., has offered to sell 7,200 units of part 231 to Sheffield for $33 per unit. If Sheffield accepts Flintrock's offer, its freed-up facilities could be used to earn $13,800 in contribution margin by manufacturing part 240, In addition, Sheffield would eliminate 40% of the fixed overhead applied to part 231 (a) Calculate total relevant cost to make and net cost to buy. Total relevant cost to make s Net relevant cost to buy s (b) Should Sheffield accept Flintrock's offer?

Explanation / Answer

a) Total relevant cost of make = (5+10+7+6)*7200+13800 = 215400

Net relevant cost to buy = (7200*33) = 237600

b) No, Sheffield accept the flintrock's offer

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